20-F 1 d39685d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14550

 

 

中国东方航空股份有限公司

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

China Eastern Airlines Corporation Limited   The People’s Republic of China
(Translation of Registrant’s Name Into English)   (Jurisdiction of Incorporation or Organization)

5/F, Block A2, Northern District, CEA Building

36 Hongxiang 3rd Road, Minhang District, Shanghai

People’s Republic of China

Tel: (8621) 6268-6268

Fax: (8621) 6268-6116

(Address and Contact Details of the Board Secretariat’s Office)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on which Registered

American Depositary Shares

Ordinary H Shares, par value RMB1.00 per share

 

CEA

 

The New York Stock Exchange

The New York Stock Exchange*

 

(1)

Not for trading, but only in connection with the registration of American Depositary Shares. The Ordinary H Shares are also listed and traded on The Stock Exchange of Hong Kong Limited.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2020, 11,202,731,426 Ordinary Domestic Shares, par value RMB1.00 per share, were issued and outstanding, and 5,176,777,777 Ordinary H Shares par value RMB1.00 per share, were issued and outstanding. H Shares are Ordinary Shares of the Company listed on The Stock Exchange of Hong Kong Limited. Each American Depositary Share represents 50 Ordinary H Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ..    Yes  ☐    No  ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  ☒   Accelerated Filer  ☐    Non-Accelerated Filer  ☐   Emerging Growth Company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.  ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

     Other   ☐ 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents
          Page No.  

PART I

     

Item 1.

   Identity of Directors, Senior Management and Advisers      3  

Item 2.

   Offer Statistics and Expected Timetable      3  

Item 3.

   Key Information      3  

Item 4.

   Information on the Company      17  

Item 4A.

   Unresolved Staff Comments      35  

Item 5.

   Operating and Financial Review and Prospects      35  

Item 6.

   Directors, Senior Management and Employees      58  

Item 7.

   Major Shareholders and Related Party Transactions      66  

Item 8.

   Financial Information      74  

Item 9.

   The Offer and Listing      76  

Item 10.

   Additional Information      77  

Item 11.

   Quantitative and Qualitative Disclosures about Market Risk      89  

Item 12.

   Description of Securities Other than Equity Securities      91  
PART II      

Item 13.

   Defaults, Dividend Arrearages and Delinquencies      92  

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds      92  

Item 15.

   Controls and Procedures      92  

Item 16A.

   Audit Committee Financial Expert      93  

Item 16B.

   Code of Ethics      93  

Item 16C.

   Principal Accountant Fees and Services      93  

Item 16D.

   Exemptions from the Listing Standards for Audit Committees      94  

Item 16E.

   Purchase of Equity Securities by the Issuer and Affiliated Purchasers      94  

Item 16F.

   Changes in Registrant’s Certifying Accountant      94  

Item 16G.

   Corporate Governance      94  

Item 16H.

   Mine Safety Disclosures      96  
PART III      

Item 17.

   Financial Statements      96  

Item 18.

   Financial Statements      96  

Item 19.

   Exhibits      96  


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SUPPLEMENTAL INFORMATION

In this Annual Report, unless otherwise specified, the term “dollars”, “U.S. dollars” or “US$” refers to United States dollars, the lawful currency of the United States of America, or the United States or the U.S.; the term “Renminbi” or “RMB” refers to Renminbi, the lawful currency of The People’s Republic of China, or China or the PRC; the term “Hong Kong dollars” or “HK$” refers to Hong Kong dollars, the lawful currency of the Hong Kong Special Administrative Region of China, or Hong Kong; the term “SGD” refers to Singapore dollars, the lawful currency of the Republic of Singapore; the term “JPY” refers to Japan Yen, the lawful currency of Japan; the term “EUR” refers to EURO, the lawful currency of EMU member countries and the term “KRW” refers to Korea Won, the lawful currency of the Republic of Korea. Any discrepancies in the tables included herein between the amounts listed and the totals are due to rounding.

In this Annual Report, the term “we”, “us”, “our”, “our/the Company”, or “our/the Group” refers to China Eastern Airlines Corporation Limited, a joint stock limited company incorporated under the laws of the PRC on April 14, 1995, and our subsidiaries, or, in respect of references to any time prior to the incorporation of China Eastern Airlines Corporation Limited, the core airline business carried on by its predecessor, China Eastern Airlines, which was assumed by China Eastern Airlines Corporation Limited pursuant to the restructuring described in this Annual Report. The term “CEA Holding” refers to our parent, China Eastern Air Holding Company, which was established on October 11, 2002 as a result of the merger of our former controlling shareholder, Eastern Air Group Company, or EA Group, with China Northwest Airlines Company and Yunnan Airlines Company.

For the purpose of this Annual Report, references to The People’s Republic of China, China and the PRC do not include Hong Kong, Taiwan, or the Macau Special Administrative Region of China, or Macau.

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

Certain information contained in this Annual Report may be deemed to constitute forward-looking statements. These forward-looking statements include, without limitation, statements relating to:

 

   

the impact of changes in the policies of the Civil Aviation Administration of China, or the CAAC, regarding route rights;

 

   

the impact of the CAAC policies regarding the restructuring of the airline industry in China;

 

   

the impact of macroeconomic fluctuations (including the fluctuations of oil prices, and interest and exchange rates);

 

   

certain statements with respect to trends in prices, volumes, operations, margins, risk management, overall market trends and exchange rates;

 

   

our fleet development plans, including, without limitation, related financing, schedule, intended use and planned disposition;

 

   

our expansion plan of the cargo operations;

 

   

our expansion plans, including possible acquisition of other airlines;

 

   

our marketing plans, including the establishment of additional sales offices;

 

   

our plan to add new pilots; and

 

   

the impact of unusual events on our business and operations.

The words or phrases “aim”, “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “potential”, “predict”, “project”, “seek”, “should”, “will”, “would”, and similar expressions or the negatives thereof, as they relate to our Company or its management, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are based on current plans and estimates, and speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statement in light of new information, future events or otherwise. Forward-looking statements are, by their nature, subject to inherent risks and uncertainties, some of which are beyond our control, and are based on assumptions and analyzes made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. We caution you that a number of important factors could cause actual outcomes to differ, or to differ materially, from those expressed in any forward-looking statement, including, without limitation:

 

  (1)

changes in political, economic, legal and social conditions in China;

 

  (2)

any changes in the regulatory policies of the CAAC;

 

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  (3)

the development of the high-speed rail network in the PRC;

 

  (4)

fluctuations of interest rates and foreign exchange rates;

 

  (5)

the availability of qualified flight personnel and airport facilities;

 

  (6)

the effects of competition on the demand for and price of our services;

 

  (7)

the availability and cost of aviation fuel, including but not limited to pricing trends and risks associated with fuel hedging;

 

  (8)

any significant depreciation of Renminbi or Hong Kong dollars against U.S. dollars, Japanese yen, Singapore dollar, Korea Won or Euro, the currencies in which the majority of our borrowings are denominated;

 

  (9)

our ability to obtain adequate financing, including any required external debt and acceptable bank guarantees; and

 

  (10)

general economic conditions in markets where we operate.

GLOSSARY OF TECHNICAL TERMS

 

Capacity measurements   
ATK (available tonne-kilometers)    the number of tonnes of capacity available for the carriage of revenue load (passengers and cargo) multiplied by the distance flown
ASK (available seat kilometers)    the number of seats made available for sale multiplied by the distance flown
AFTK (available freight tonne-kilometers)    the number of tonnes of capacity available for the carriage of cargo and mail multiplied by the distance flown
Traffic measurements   
revenue passenger-kilometers or RPK    the number of passengers carried multiplied by the distance flown
revenue freight tonne-kilometers or RFTK    cargo and mail load in tonnes multiplied by the distance flown
revenue passenger tonne-kilometers or RPTK    passenger load in tonnes multiplied by the distance flown
revenue tonne-kilometers or RTK    load (passenger and cargo) in tonnes multiplied by the distance flown
Load factors   
overall load factor    tonne-kilometers expressed as a percentage of ATK
passenger load factor    passenger-kilometers expressed as a percentage of ASK
Yield and cost measurements   
passenger yield (revenue per passenger-kilometer)    revenue from passenger operations divided by passenger-kilometers
cargo and mail yield (revenue per cargo and mail tonne-kilometer)    revenue from cargo and mail operations divided by cargo and mail
tonne-kilometers
average yield (revenue per total tonne-kilometer)    revenue from airline operations divided by tonne-kilometers
unit cost    operating expenses divided by ATK
Tonne    a metric ton, equivalent to 2,204.6 lbs

 

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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

A.

Selected Financial Data

Pursuant to U.S. Securities and Exchange Commission (“SEC” or “Securities and Exchange Commission”) Release 33-8879Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP ” eliminating the requirement for foreign private issuers to reconcile their financial statements to U.S. GAAP, we prepare our financial statements based on International Financial Reporting Standards, or IFRSs, as issued by the International Accounting Standards Board, or the IASB, and no longer provide a reconciliation between IFRSs and U.S. GAAP.

Our consolidated financial statements as of December 31, 2019 and 2020 and for the years ended December 31, 2018, 2019 and 2020 included in this Annual Report on Form 20-F have been prepared in accordance with IFRSs.

We make an explicit and unreserved statement of compliance with IFRSs with respect to our consolidated financial statements as of December 31, 2019 and 2020 and for the years ended December 31, 2018, 2019 and 2020 included in this Annual Report. Ernst & Young Hua Ming LLP, our current independent registered public accounting firm in the PRC, has issued an unqualified auditor’s report on our consolidated statements of financial position as of December 31, 2019 and 2020 and the related consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the years ended December 31, 2018, 2019 and 2020. The selected financial data from the consolidated profit or loss and other comprehensive income for the year ended December 31, 2017 and the selected financial data from the consolidated financial position as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRSs, and audited by Ernst & Young Hua Ming LLP. The selected financial data from the consolidated profit or loss and other comprehensive income for the year ended December 31, 2016 and the selected financial data from the consolidated financial position as of December 31, 2016 have been derived from our audited consolidated financial statements, which have been prepared in accordance with IFRSs, and audited by Ernst & Young, an independent registered public accounting firm in Hong Kong.

The following tables present selected consolidated profit or loss and comprehensive income data for the years ended December 31, 2016, 2017, 2018, 2019 and 2020 and selected consolidated statements of financial position data as of December 31, 2016, 2017, 2018, 2019 and 2020 that were prepared under IFRSs. The selected financial information as of December 31, 2019 and 2020 and for the years ended December 31, 2018, 2019 and 2020 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and their notes included elsewhere in this Annual Report. We initially applied IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers on January 1, 2018 and IFRS 16 Leases on January 1, 2019 and elected not to reflect the figures on a retrospective basis in comparative periods.

 

     Year Ended December 31,  
     2016     2017     2018     2019     2020  
     RMB     RMB     RMB     RMB     RMB  
     (in RMB millions, except per share or per ADS data)  

Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:

          

Revenues

     98,904       102,475       115,278       120,986       58,727  

Other operating income and gains

     5,469       7,481       6,592       7,202       5,698  

Operating expenses(1)

     (91,887     (100,525     (112,561     (118,107     (78,265

Operating profit /(loss)

     12,486       9,431       9,309       10,081       (13,840

Finance costs, net

     (6,176     (1,072     (5,657     (6,064     (2,553

Profit /(loss) before income tax

     6,497       8,610       3,856       4,299       (16,488

Profit /(loss) for the year attributable to the equity holders of the Company

     4,498       6,342       2,698       3,192       (11,836

Basic and fully diluted earnings /(loss) per share (2)

     0.33       0.44       0.19       0.21       (0.72

Basic and fully diluted earnings /(loss) per ADS

     16.5       22.0       9.5       10.5       (36

 

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Notes:

 

(1)

Including gain on fair value changes of derivative financial instruments of RMB2 million, RMB311 million, nil and nil for the years ended December 31, 2016, 2018, 2019 and 2020, respectively, and loss on fair value changes of derivative financial instruments of RMB311 million for the year ended December 31, 2017.

(2)

The calculation of earnings per share for 2016 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 13,811,136,000 ordinary shares in issue. The calculation of earnings per share for 2017 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 14,467,585,682 ordinary shares in issue. The calculation of earnings per share for 2018 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 14,467,585,682 ordinary shares in issue. The calculation of earnings per share for 2019 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 15,104,893,522 ordinary shares in issue. The calculation of loss per share for 2020 is based on the loss attributable to the equity holders of the Company divided by the weighted average number of 16,379,509,203 ordinary shares in issue.

 

     As of December 31,  
     2016     2017     2018     2019     2020  
     RMB     RMB     RMB     RMB     RMB  
     (in RMB millions)  

Consolidated Statements of Financial Position Data:

 

Cash and cash equivalents

     1,695       4,605       646       1,350       7,651  

Net current liabilities

     (52,194     (62,035     (57,132     (58,620     (77,310

Non-current assets

     196,436       211,434       223,085       265,442       262,152  

Long term borrowings, including current portion

     (29,749     (28,842     (32,506     (31,137     (39,429

Lease liabilities, including current portion

     —         —         —         (110,275     (96,251

Obligations under finance leases, including current portion

     (61,041     (66,868     (77,427     —         —    

Total share capital and reserves attributable to the equity holders of the Company

     49,450       55,360       58,008       69,008       56,249  

Non-current liabilities

     (91,876     (90,621     (104,352     (134,176     125,688  

Total assets less current liabilities

     144,242       149,399       165,953       206,822       184,842  

Total assets

     212,324       229,727       239,017       285,185       284,650  

Net assets

     52,366       58,778       61,601       72,646       59,154  

Selected Operating Data

The following table sets forth certain of our operating data for the five years ended December 31, 2020, which is not audited. All references in this Annual Report to our cargo operations, statistics or revenues include figures for cargo and mail.

 

      Year Ended December 31,  
    2016     2016     2017     2017     2018     2019     2020  
   

(non-comparable

basis) (1)

   

(comparable

basis)(2)

   

(non-comparable

basis) (3)

   

(comparable

basis) (4)

                   

Selected Airline Operating Data:

             

Capacity:

             

ATK (millions)

    28,002.3       25,097.6       27,396.9       27,136.6       29,936.5       33,455.6       20,632.5  

ASK (millions)

    206,249.3       —         225,996.3       —         244,841.0       270,254.0       152,066.4  

AFTK (millions)

    9,439.9       6,535.2       7,057.3       6,797.0       7,900.8       9,132.7       6,946.5  

Traffic:

             

Revenue passenger-kilometers (millions)

    167,529.2       —         183,182.0       —         201,486.0       221,779.1       107,273.3  

Revenue tonne-kilometers (millions)

    19,712.9       17,333.1       18,856.1       18,651.3       20,358.4       22,518.0       11,699.7  

Revenue freight tonne-kilometers (millions)

    4,875.2       2,495.4       2,663.0       2,458.2       2,588.3       2,971.4       2,200.1  

Hours flown (thousands)

    1,956.5       1,918.8       2,072.7       2,069.3       2,206.0       2,394.0       1,547.6  

Number of passengers carried (thousands)

    101,741.6       —         110,811.4       —         121,199.7       130,297.4       74,621.2  

Weight of cargo carried (millions of kilograms)

    1,395.0       929.3       933.3       894.3       915.1       976.6       711.8  

Load Factor:

             

Overall load factor (%)

    70.4       69.1       68.8       68.7       68.0       67.3       56.7  

Passenger load factor (%)

    81.2       —         81.1       —         82.3       82.1       70.5  

Yield and Cost Statistics (including fuel surcharge) (RMB):

             

Passenger yield (passenger revenue/ passenger- kilometers)

    0.52       —         0.52       —         0.54       0.52       0.49  

Cargo and mail yield (cargo and mail revenue/cargo and mail tonne-kilometers)

    1.25       1.25       1.36       1.36       1.40       1.29       2.23  

Average yield (passenger and cargo revenue/ tonne-kilometers)

    4.71       5.18       5.25       5.30       5.53       5.32       4.94  

Unit cost (operating expenses/ATK)

    3.28       3.66       3.67       4.15       3.76       3.53       3.79  

 

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Notes:

 

(1)

On November 29, 2016, we entered into an equity transfer agreement with Eastern Airlines Industry Investment Company Limited (“Eastern Airlines Industry Investment”), in relation to the transfer of 100% equity interests in Eastern Airlines Logistics Co., Ltd. (“Eastern Logistics”) held by us to Eastern Airlines Industry Investment. China Cargo Airlines Co., Ltd (“China Cargo Airlines”), a non-wholly owned subsidiary of Eastern Logistics, operated nine freighters then. On February 8, 2017, we completed the transfer of 100% equity interest in Eastern Logistics to Eastern Airlines Industry Investment and the nine freighters operated by China Cargo Airlines ceased to be included in our fleet. Under non-comparable basis, our operating data in 2016 included our whole cargo freight data during the period from February to December 2016.

(2)

Under comparable basis, our operating data in 2016 did not include our whole cargo freight data during the period from February to December 2016.

(3)

Under non-comparable basis, the operating data in 2017 included our whole cargo freight data in January 2017.

(4)

Under comparable basis, the operating data in 2017 did not include our whole cargo freight data in January 2017.

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

Risks Relating to our Business

The COVID-19 pandemic and measures to reduce its spread have had, and will likely continue to have, a material adverse impact on our business, results of operations and financial condition.

The outbreak of the COVID-19 pandemic and implementation of measures to reduce its spread have adversely impacted our business and continue to adversely impact our business in a number of ways. Multiple countries have responded to the virus with air travel restrictions and closures, testing requirements or recommendations against air travel. We experiencd a significant decline in domestic and international demand due to the decreased willingness to travel and the implementation of the “Five-One” policy for international flights by the Civil Aviation Administration. For the year ended December 31, 2020, our total ASK, total number of passengers carried and passenger load factor decreased by 43.7%, 42.7% and 11.5 percentage points, respectively, as compared to the same period of 2019. The decline in demand caused a material deterioration in our revenues in 2020, resulting in a net loss attributable to shareholders of RMB11.8 billion.

The extent of the impact of the COVID-19 pandemic on our business, results of operations and financial condition will depend on future developments, including the currently unknowable duration of the COVID-19 pandemic; the efficacy of, ability to administer and extent of adoption of any COVID-19 vaccines domestically and globally; the impact of existing and future governmental regulations, travel restrictions that are imposed in response to the pandemic and the impact of the COVID-19 pandemic on consumer behavior, such as a reduction in the demand for air travel. The total potential economic impact brought on by the COVID-19 pandemic is difficult to assess or predict, and it has already caused, and is likely to result in further, significant disruptions to global financial markets, which may reduce our ability to access capital on favorable terms or at all, and increase the cost of capital.

In addition, a recession, depression or other sustained adverse economic event resulting from the spread of the coronavirus would materially adversely impact our business and our medium- and long-term financial condition and operations. Unfavorable economic conditions have driven changes in travel patterns, including reduced spending for both leisure and business travel. Unfavorable economic conditions, when low fares are often used to stimulate traffic, have also historically hampered the ability of airlines to raise fares to counteract any increases in fuel, labor, and other costs.

Recent developments with respect to the COVID-19 vaccines have the potential to affect the scope and duration of the pandemic. While a number of the COVID-19 vaccines have received regulatory approval and are available in the PRC and other parts of the world, a degree of uncertainty exists with respect to the distribution, utilization, and long-term efficacy of vaccinations among the general population. The impact of the COVID-19 vaccines on the pandemic, demand for air travel, and our business remain unknown. Even once the pandemic and fears of travel subside, demand for air travel may remain weak for a significant period of time. In particular, consumer behavior related to traveling may be negatively impacted by adverse changes in the perceived or actual economic climate, including higher unemployment rates, declines in income levels, and loss of wealth resulting from the impact of the COVID-19 pandemic. The ultimate impact of the COVID-19 pandemic is still highly uncertain and subject to change. Moreover, any other adverse public health developments, including SARS, Ebola, Avian Flu or Influenza A (H1N1), the COVID-19 pandemic, and the occurrence of natural disasters may, among other things, also lead to travel restrictions and reduced levels of economic activity in the affected areas, which may in turn significantly reduce demand for our services and have a material adverse effect on our financial condition and results of operations.

 

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We may suffer losses in the event of an accident or incident involving our aircraft or the aircraft of any other airline.

As an airline company operating a large fleet, an accident or incident involving one of our aircraft could result in delays and require repair or replacement of a damaged aircraft, which could result in consequential temporary or permanent losses from disruption of service and/or significant liability to injured passengers and others. Unforeseeable or unpredictable events such as inclement weather, mechanical failures, human error, aircraft defects and other force majeure events may affect flight safety, which could result in accidents and/or incidents of passenger injuries or deaths that could lead to significant injury and loss claims. Although we believe that we currently maintain liability insurance in amounts and of the types generally consistent with industry practice, the amount of such coverage may not be adequate to cover the costs related to an accident or incident in full, which could damage our results of operations and financial condition. In addition, any aircraft accident or incident, even if fully insured, could cause a public perception that we are not as safe or reliable as other airlines, which could harm our competitive position and result in a decrease in our operating revenues. Moreover, a major accident or incident involving an aircraft of our competitors may cause the demand for air travel in general to decrease. In particular, certain of our competitors in the Asia Pacific region experienced major aircraft accidents and incidents in 2014, some of which involved destinations and routes that we cover. Also, there were accidents and incidents involving other airline companies and aircraft manufacturers in recent years. These accidents and incidents were highly publicized in the media and may have affected public perception of certain air travel routes, airline companies and aircraft manufacturers. The occurrence of any of the foregoing could adversely affect our results of operations and financial condition.

Our indebtedness and other financial obligations may have a material adverse effect on our liquidity and operations.

We have a substantial amount of debt, lease and other financial obligations, and will continue to do so in the future. As of December 31, 2020, our total liabilities were approximately RMB225,496 million and our current liabilities exceeded our current assets by approximately RMB77,310 million. Our total interest-bearing liabilities (including long-term and short-term bank borrowings, lease liabilities, bonds payable and super short-term debentures) as of December 31, 2019 and 2020 were approximately RMB162,147 million and RMB184,168 million, respectively, of which interest-bearing current liabilities accounted for approximately 25.2% and 38.7%, respectively. Our substantial indebtedness and other financial obligations could materially and adversely affect our business and operations, including being required to dedicate additional cash flow from operations to the payment of principal and interest on our indebtedness, thereby reducing the funds available for operations, maintenance and service improvements and future business opportunities, increasing our vulnerability to economic recessions, reducing our flexibility in responding to changing business and economic conditions, placing us at a disadvantage compared to competitors with lower debt, limiting our ability to arrange for additional financing for working capital, capital expenditures and other general corporate purposes, at all or on terms that are acceptable to us.

Moreover, we are largely dependent upon cash flows generated from our operations and external financing to meet our debt repayment obligations and working capital requirements, which may reduce the funds available for other business purposes. However, the widespread and continuous COVID-19 pandemic has materially decreased passenger demand, thereby adversely affecting operating income and cash flows from operations. In 2020, the passenger traffic (as measured in RPKs) was 107,273 million passenger-kilometres, representing a decrease of 51.6% from 2019. In 2020, our passenger revenue amounted to RMB49,215 million, representing a decrease of 55.4% from 2019. If our operating cash flow is under continous adverse impact of factors such as increased competition, a significant decrease in demand for our services resulting from worldwide epidemic such as the COVID-19 pandemic as well as a significant increase in jet fuel prices, our liquidity would be materially and adversely affected. We also try to secure sufficient financing through financing arrangements with domestic and foreign banks in China as well as from debt and equity capital markets. In 2020, we actively expanded financing channels, and issued a total of RMB77.2 billion of super short-term debentures and RMB2 billion of corporate bonds to ensure that the cash flow can meet our operation needs. However, our ability to obtain financing may be affected by our financial position and leverage, our credit rating and investor perception of the aviation industry, as well as prevailing economic conditions and the cost of financing in general. If we are unable to obtain adequate financing for our capital requirements, our liquidity and operations would be materially and adversely affected.

In addition, the airline industry overall is characterized by a high degree of operating leverage. Due to high fixed costs, including payments made in connection with aircraft leases, and landing and infrastructure fees which are set by government authorities and not within our control, the expenses relating to flight operations do not vary proportionately with the number of passengers carried, while revenues generated from a particular flight are directly related to the number of passengers carried and the fare structure of the flight. Accordingly, a decrease in revenues may result in a disproportionately higher decrease in profits.

 

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We may not be able to secure future financing at terms acceptable to us or at all.

We require significant amounts of external financing to meet our capital commitments for acquiring and upgrading aircraft and flight equipment and for other general corporate needs. As of December 31, 2020, we had total unutilized credit facilities of approximately RMB33.7 billion from various banks. We expect to roll over these bank facilities in the near future. In addition, we generally acquire aircraft through either long-term capital leases or operating leases. In the past, we have obtained guarantees from Chinese banks in respect of payments under our foreign loan and capital lease obligations. However, we cannot assure you that we will be able to roll over our bank facilities or continue to obtain bank guarantees in the future. Unavailability of credit facilities or guarantees from Chinese banks or the increased cost of such guarantees may materially and adversely affect our ability to borrow additional funds or enter into international aircraft lease financing or other additional financing on acceptable terms. In addition, if we are not able to arrange financing for our aircraft on order, we may seek to defer aircraft deliveries or use cash from operations or other sources to acquire the aircraft.

Our ability to obtain financing may also be impaired by our financial position, leverage and credit rating. In addition, factors beyond our control, such as recent global market and economic conditions, volatile oil prices, and the tightening of credit markets may result in limited availability of financing and increased volatility in credit and equity markets, which may materially and adversely affect our ability to secure financing at reasonable costs or at all. If we are unable to obtain financing for a significant portion of our capital requirements, our ability to expand our operations, purchase new aircraft, pursue business opportunities we believe to be desirable, withstand any future downturn in our business, or respond to increased competition or changing economic conditions may be impaired. We have and in the future will likely continue to have substantial debts. As a result, the interest costs associated with these debts might impair our future profitability.

We are subject to the risk of fuel price fluctuations.

Jet fuel is one of the major expenses of airlines. Significant fluctuations of international oil prices will significantly impact jet fuel prices and our revenue from fuel surcharge and accordingly our results of operations. In 2020, our total aircraft fuel cost was approximately RMB13,840 million, representing a decrease of approximately 59.5% from approximately RMB34,191 million in 2019. The decrease was due to a decline in our fuel consumption by 38.5% and a drop in the average price of fuel by 34.2% from last year, both of which are attributable to the impact of the COVID-19 pandemic. In 2020, our total jet fuel cost accounted for approximately 17.7% of our total operating expenses, as compared to approximately 28.9% in 2019. As affected by the COVID-19 pandemic, there remains great uncertainty on our fuel consumption in 2021, and hence, there also remains great uncertainty on the expected jet fuel costs.

The fluctuations of international crude oil prices and adjustments on domestic jet fuel prices by the National Development and Reform Commission (the “NDRC”) have a significant impact on our profitability. Aircraft fuel prices have been subject to high volatility, fluctuating substantially over the past several years. Our results of operation and financial condition are affected by any significant fluctuations that may occur, which are generally due to factors beyond our control. As such, we generally alleviate the pressure from the rise in operating costs arising from the increase in aviation fuel by imposing fuel surcharges, which, however, are subject to government regulations. In order to control fuel costs, we have also entered into fuel hedging transactions using financial derivative products linked to the price of underlying assets such as United States WTI crude oil and Singapore jet fuel during previous years. In 2020, we used jet fuel forward contracts to deal with the cash flow risks arising from fluctuation of jet fuel prices. The jet fuel forward contracts entered into by us are mainly based on the purchase of jet fuel at a fixed transaction price, and are cash flow hedges. As of December 31, 2020, the notional amount of the outstanding jet fuel forward contracts held by us was approximately US$252 million, and will expire between 2021 and 2022. As of December 31, 2019, the notional amount of the outstanding jet fuel forward contracts held by us was nil.

Since 2009, the PRC government required prior governmental approval for entering into fuel forward contracts. We may, from time to time, seek approval from the PRC government to enter into overseas fuel forward contracts. However, these hedging strategies may not always be effective and high fluctuations in aviation fuel prices exceeding the locked-in price ranges may result in losses. Significant decline in fuel prices may substantially increase the costs associated with such fuel hedging arrangements. In addition, where we may, from time to time, seek to manage the risk of fuel price increases by using derivative contracts, we cannot assure you that, at any given point in time, such fuel hedging transactions will provide any particular level of protection against increased fuel costs.

 

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We are subject to the risk of exchange rate fluctuations.

We operate our business in many countries and territories. We generate revenue in different currencies, and our foreign currency liabilities are typically much higher than our foreign currency assets. Our purchases and leases of aircraft are mainly priced and settled in foreign currencies such as U.S. dollars. Fluctuations in exchange rates will affect our costs incurred from foreign purchases such as aircraft, flight equipment and aviation fuel, and take-off and landing charges in foreign airports. As of December 31, 2020, our total interest-bearing liabilities denominated in foreign currencies amounted to approximately RMB47,364 million, of which U.S. dollar interest-bearing liabilities accounted for approximately 77.4%. Therefore, a significant fluctuation in exchange rates will subject us to significant foreign exchange loss/gain arising from the exchange of foreign currency denominated liabilities, which would affect our profitability and business development. We typically use hedging contracts for foreign currencies to reduce the foreign exchange risks for foreign currency revenues generated from flight ticket sales and expenses required to be paid in foreign currencies. As of December 31, 2019, the outstanding forward foreign currency contracts held by us amounted to a notional amount of approximately US$776 million. As of December 31, 2020, our forward foreign currency contracts have all expired, and there are no outstanding forward foreign currency contracts.

We recorded net foreign exchange losses of approximately RMB990 million in 2019 and net foreign exchange gains of approximately RMB2,494 million in 2020. However, as a result of the large value of existing net foreign currency liabilities denominated in U.S. dollars, our results would be adversely affected if the Renminbi depreciates against the U.S. dollar or the rate of appreciation of the Renminbi against the U.S. dollar decreases in the future. In 2017 and the first quarter of 2018, we expanded our financing channels by issuing guaranteed bonds and credit enhanced bonds denominated in SGD and JPY, and proactively optimized the mix of currency denomination of our debts. In 2019, we expanded our financing channels by means of issuing super short-term debentures and acquiring RMB borrowings to bring in RMB financing, continuing to optimize the mix of currency denomination of our debts. As of December 31, 2020, our proportion of U.S. dollar-denominated interest-bearing debts out of our total interest-bearing liabilities decreased to approximately 19.9% from 28.7% as of December 31, 2019. Our foreign exchange fluctuation risks are also subject to other factors beyond our control.

We are subject to the risk of interest rate fluctuations.

Our total interest-bearing liabilities (including long-term and short-term bank borrowings, lease liabilities, bonds payable and super short-term debentures) as of December 31, 2019 and 2020 were approximately RMB162,147 million and RMB184,168 million, respectively, of which short-term interest-bearing liabilities accounted for approximately 25.2% and 38.7%, respectively, and long-term interest-bearing liabilities accounted for approximately 74.8% and 61.3%, respectively. Both the short-term and long-term interest-bearing liabilities were affected by fluctuations in current market interest rates.

Our interest-bearing liabilities were primarily denominated in RMB and USD. As of December 31, 2019 and December 31, 2020, our interest-bearing liabilities denominated in RMB accounted for approximately 64.0% and 74.3% % of our total interest-bearing liabilities, respectively, and interest-bearing liabilities denominated in USD accounted for approximately 28.7% and 19.9% of our total interest-bearing liabilities, respectively. Fluctuations in interest rates of interest-bearing liabilities denominated in these two currencies have and will continue to have significant impact on our finance costs. As of December 31, 2020, the weighted average interest rates of our RMB-denominated interest-bearing liabilities, USD-denominated interest-bearing liabilities, EUR-denominated interest-bearing liabilities, SGD-denominated interest-bearing liabilities, KRW-denominated interest-bearing liabilities and JPY-denominated interest-bearing liabilities were approximately 3.08%, 2.97%,0.11%, 1.22%, 2.41% and 0.66%, respectively. In the first quarter of 2018, we also issued credit enhanced bonds denominated in JPY with total principal of JPY50.0 billion due in 2021, bearing fixed interest at the rate of 0.33% per annum and 0.64% per annum for different tranches. To cope with the risk of interest rate fluctuation, we strategically changed our debt portfolio by replacing our USD-denominated liabilities with floating interest rates with USD-denominated liabilities with fixed interest rates. As of December 31, 2020, our USD-denominated interest-bearing liabilities with fixed interest rate was approximately US$3,699 million and accounted for approximately 77.6% of our total long-term interest-bearing USD-denominated liabilities, increasing by approximately 68.0% as of December 31, 2019. As of December 31, 2020, our outstanding interest rate swap contracts amounted to a notional principal amount of US$690 million as compared to US$888 million as of December 31, 2019. These contracts will expire between the duration of 2021 to 2025. We will continue to optimize our liability structure to lower relevant risks by taking consideration of various factors including the market environment, interest rates and strategic plan. However, we cannot assure you that the relevant lending rates may not increase in the future for reasons beyond our control, which may adversely affect our business, prospects, cash flows, financial condition and results of operations. In addition, we expect to issue bonds and notes or enter into additional loan agreements and aircraft leases in the future to fund our operations and capital expenditures, and the cost of financing for these obligations will depend greatly on market interest rates.

 

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Increases in insurance costs or reductions in insurance coverage may have adverse impact our results of operations and financial condition.

We could be exposed to significant liability or loss if our property or operations were to be affected by a natural catastrophe or other event, including aircraft accidents. We maintain insurance policies but we are not fully insured against all potential hazards and risks incident to our business. If we are unable to obtain sufficient insurance with acceptable terms or if the coverage obtained is insufficient relative to actual liability or losses that we experience, whether due to insurance market conditions, policy limitations and exclusions or otherwise, our results of operations and financial condition could be adversely affected.

We may experience difficulty integrating our acquisitions, which could result in a material adverse effect on our operations and financial condition.

We may from time to time expand our business through acquisition of airlines or airline-related businesses. We may devote significant resources to the integration of our operations in order to achieve the anticipated synergies and benefits of the absorption and acquisitions mentioned above. See “Item 4. Information on the Company” for details. However, such acquisitions involve uncertainties and a number of risks, including:

 

   

difficulty with integrating the assets, operations and technologies of the acquired airlines or airline-related businesses, including their employees, corporate cultures, managerial systems, processes, procedures and management information systems and services;

 

   

complying with the laws, regulations and policies that are applicable to the acquired businesses;

 

   

failure to achieve the anticipated synergies, cost savings or revenue-enhancing opportunities resulting from the acquisition of such airlines or airline-related businesses;

 

   

managing relationships with employees, customers and business partners during the course of integration of new businesses;

 

   

attracting, training and motivating members of our management and workforce;

 

   

accessing our debt, equity or other capital resources to fund acquisitions, which may divert financial resources otherwise available for other purposes;

 

   

diverting significant management attention and resources from our other businesses;

 

   

strengthening our operational, financial and management controls, particularly those of our newly acquired assets and subsidiaries, to maintain the reliability of our reporting processes;

 

   

difficulty with exercising control and supervision over the newly acquired operations, including failure to implement and communicate our safety management procedures resulting in additional safety hazards and risks;

 

   

increased financial pressure resulting from the assumption of recorded and unrecorded liabilities of the acquired airlines or airline-related businesses; and

 

   

the risk that any such acquisitions may not close due to failure to obtain the required government approvals.

We cannot assure you that we will not have difficulties in assimilating the operations, technologies, services and products of newly acquired companies or businesses. Moreover, the continued integration of our acquired companies into our Company depends significantly on integrating the employees of our acquired companies with our employees and on maintaining productive employee relations. In the event that we are unable to efficiently and effectively integrate newly acquired companies or airline-related businesses into our Company, we may be unable to achieve the objectives or anticipated synergies of such acquisitions and such acquisitions may adversely impact the operations and financial results of our existing businesses.

We may be unable to retain key management personnel or pilots.

We are dependent on the experience and industry knowledge of our key management personnel and pilots, and there can be no assurance that we will be able to retain them. Any inability to retain our key management employees or pilots, or attract and retain additional qualified management employees or pilots, could have a negative impact on our operations and profitability.

 

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Our controlling shareholder, CEA Holding, holds a majority interest in our Company, and its interests may not be aligned with other shareholders.

Most of the major airlines in China are currently majority-owned by either the central government or provincial or municipal governments in China. As of December 31, 2020, CEA Holding holds directly or indirectly 49.79% of our Company’s equity stake on behalf of the PRC government. As a result, CEA Holding could potentially elect the majority of the board of directors of the Company (“Board of Directors” or the “Board”) and otherwise be able to control us. CEA Holding also has sufficient voting control to effect transactions without the concurrence of our minority shareholders. The interests of the PRC government as the ultimate controlling shareholder of our Company and most of the other major PRC airlines could conflict with the interests of our minority shareholders. Although the CAAC currently has a policy of equal treatment of all PRC airlines, we cannot assure you that the CAAC will not favor other PRC airlines over us.

As our controlling shareholder, CEA Holding has the ability to exercise controlling influence over our business and affairs, including, but not limited to, decisions with respect to:

 

   

mergers or other business combinations;

 

   

acquisition or disposition of assets;

 

   

issuance of any additional shares or other equity securities;

 

   

the timing and amount of dividend payments; and

 

   

the management of our Company.

We engage in related party transactions, which may result in conflict of interests.

We have engaged in, from time to time, and may continue to engage in, in the future, a variety of transactions with CEA Holding and its various members, from whom we receive a number of important services, including support for in-flight catering and assistance with importation of aircraft, flight equipment and spare parts. Because we are controlled by CEA Holding and CEA Holding may have interests that conflict with our interests, we cannot assure you that CEA Holding will not take actions that will serve its interests over our interests.

We may not be able to accurately report our financial results or prevent fraud if we fail to maintain effective internal controls over financial reporting, resulting in adverse investor perception, which in turn could have a material adverse effect on our reputation and the performance of our shares and American Depositary Shares (the “ADSs”).

We are required under relevant United States securities laws and regulations to disclose in the reports that we file or submit under the Exchange Act to the SEC, including our annual report on Form 20-F, a management report assessing the effectiveness of our internal controls over financial reporting at the end of the fiscal year. Our registered public accounting firm is also required to provide an attestation report on the effectiveness of our internal controls over financial reporting. Our management concluded that our internal controls over financial reporting were effective as of December 31, 2020. However, we may discover other deficiencies or material weaknesses in the course of our future evaluation of our internal controls over financial reporting and we may be unable to address and rectify such deficiencies in a timely manner. Any failure to maintain effective internal controls over financial reporting could lead to diminished investor confidence in the reliability of our consolidated financial statements, thereby adversely affecting our business, operations, and reputation, including negatively affecting our performance in the securities markets and decreasing potential opportunities to obtain financing in the capital markets.

As part of our business strategy, we have adopted various measures to develop the international side of our business and to enhance our competitiveness in the international long-distance flight routes. Due to the differences in certain legal and market environments, we have encountered certain challenges during the course of developing our overseas business. We have already adopted and will continue to implement measures in order to enhance the internal controls of our overseas offices and to continue the development of our overseas business.

 

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Any failure or disruption of our computer, communications, flight equipment or other technology systems could have an adverse impact on our business operations, profitability, reputation and customer services.

We rely heavily on computer, communications, flight equipment and other technology systems to operate our business and enhance customer service. Substantially all of our tickets are issued to passengers as electronic tickets, and we depend on our computerized reservation system to be able to issue, track and accept these electronic tickets. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs. These systems could be disrupted due to various events, including natural disasters, power failures, terrorist attacks, equipment failures, software failures, computer viruses, cyber attacks and other events beyond our control. We cannot assure you that the measures we have taken to reduce the risk of some of these potential disruptions are adequate to prevent disruptions to or failures of these systems. Any substantial or repeated failure of or disruption to these systems could result in the loss of important data and/or flight delays, and could have an adverse impact on our business operations, profitability, reputation and customer services, including being liable for paying compensation to our customers.

We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.

The nature of our business involves the receipt and storage of personal information about our customers. We have a program in place to detect and respond to data security incidents. To date, all incidents we have encountered have been insignificant. If we commit a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to stop using our services. The loss of consumer confidence from a significant data security breach could hurt our reputation and adversely affect our business, result of operations and financial condition.

Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants, costs incurred in connection with the notifications to employees, suppliers or the general public as part of our notification obligations to the various government authorities that govern our business, or costs to dedicate significant resources to system repairs or other increase cyber security protection. We may also be required to pay fines in connection with stolen customer, employee or other confidential information, or incur significant litigation or other costs. In October 2020, the Standing Committee of the National People’s Congress officially released the draft of the Personal Information Protection Law, or the Draft Personal Information Protection Law. The Draft Personal Information Protection Law provides the basic regime for personal information protection, including without limitation, stipulating an expanded definition of personal information, providing a long-arm jurisdiction in cross-border scenarios, emphasizing individual rights, and prohibiting rampant infringement of personal information, such as stealing, selling, or secretly collecting personal information. If the Draft Personal Information Protection Law is promulgated as an effective regulation in the future, we cannot assure you that our business operations will comply with such regulation in all respects and we may be ordered to terminate certain of our business operations that are deemed illegal by the regulatory authorities and become subject to fines and/or other sanctions.

Interruptions or disruptions of service at one or more airports in our primary market could have an adverse impact on us.

Our business is heavily dependent on our operations at our core hub airports in Shanghai, namely, Hongqiao International Airport and Pudong International Airport and our core hub airport in Beijing, namely, Beijing Daxing International Airport as well as our regional hub airports in Xi’an and Kunming. Each of these operations includes flights that connect our primary market to other major cities. Any significant interruptions or disruptions of service at one or more of our primary market airports could adversely impact our operations.

Terrorist attacks or the fear of such attacks, even if not made directly on the airline industry, could negatively affect us and the airline industry as a whole. The travel industry continues to face on-going security concerns and cost burdens.

The aviation industry as a whole has been beset with high-profile terrorist attacks, most notably on September 11, 2001 in the United States. The CAAC has also implemented increased security measures in relation to the potential threat of terrorist attacks. Terrorist attacks, even if not made directly towards us or on the airline industry, or the fear of or the precautions taken in anticipation of such attacks (including elevated threat warnings or selective cancelation or redirection of flights) could materially and adversely affect us and the entire airline industry. In addition, potential or actual terrorist attacks may result in substantial flight disruption costs caused by grounding of fleet, significant increase of security costs and associated passenger inconvenience, increased insurance costs, substantially higher ticket refunds and significantly decreased traffic and RPK. International terrorist attacks targeting aircraft and airport not only directly threatens our flight safety, aviation security, operational safety and the safety of overseas institutions and employees, but also brings about on-going adverse impact on the outbound tourism demand for places where terrorist attacks have taken place.

 

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We could be classified as a passive foreign investment company by the United States Internal Revenue Service and may therefore be subject to adverse tax impact.

Depending upon the relative values of our passive assets and income as compared to our total assets and income each taxable year, we could be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. We believe that we were not a PFIC for the taxable year 2020. However, there can be no assurance that we will not be a PFIC for the taxable year 2021 and/or later taxable years, as PFIC status is re-tested each year and depends on the facts in such year.

We will be classified as a PFIC in any taxable year if either: (1) the average value during the taxable year of our assets that produce passive income, or are held for the production of passive income, is at least 50% of the average value of our total assets for such taxable year (the “Asset Test”) or (2) 75% or more of our gross income for the taxable year is passive income (such as certain dividends, interest or royalties) (the “Income Test”). For purposes of the Asset Test: (1) any cash, cash equivalents, and cash invested in short-term, interest bearing, debt instruments, or bank deposits that is readily convertible into cash, will generally count as producing passive income or as being held for the production of passive income and (2) the average values of our passive and total assets is calculated based on our market capitalization.

If we were a PFIC, we would generally be subject to additional taxes and interest charges on certain “excess distributions” our Company makes regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution”. An “excess distribution” would be either (1) the excess amount of a distribution with respect to ADSs during a taxable year in which distributions to you exceed 125% of the average annual distributions to you over the preceding three taxable years or, if shorter, your holding period for the ADSs, or (2) 100% of the gain from the disposition of ADSs.

Risks Relating to the Aviation Industry

Our business is subject to extensive government regulation.

The Chinese civil aviation industry is subject to a high degree of regulation by the CAAC. Regulatory policies issued or implemented by the CAAC encompass virtually every aspect of airline operations, including, among other things:

 

  (a)

route allocation;

 

  (b)

pricing of domestic airfares;

 

  (c)

administration of air traffic control systems and certain airports;

 

  (d)

jet fuel pricing;

 

  (e)

air carrier certifications and air operator certification;

 

  (f)

aircraft registration and aircraft airworthiness certification; and

 

  (g)

airport expense policy.

Our ability to provide services on international routes is subject to a variety of bilateral civil air transport agreements between China and other countries, international aviation conventions and local aviation laws. As a result of government regulations, we may face significant constraints on our flexibility and ability to expand our business operations or to maximize our profitability. In addition, as we operate internationally and corporate with various counterparties domestically and overseas, we may be exposed to the risks associated with foreign laws, regulations or other challenges arising from the regulatory aspect.

The downward trend in domestic and global economy could affect air travel.

The airline industry is highly cyclical, and the level of demand for air travel is correlated to the strength of domestic and global economies. Robust demand for our air transportation services depends largely on favorable general economic conditions, including the strength of global and local economies, low unemployment, strong consumer confidence and availability of consumer and business credit. The COVID-19 pandemic had a severe and negative impact on the Chinese and the global economy in 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of the COVID-19 pandemic, the global macroeconomic environment was facing numerous challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations, and tariffs. Any economic downturn or slowdown and/or negative business sentiment could potentially have an adverse indirect impact on almost all industries, and our business operations and financial condition may consequently be adversely affected.

 

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We operate in a highly competitive industry.

We face intense competition in each of the domestic, regional and international markets that we serve. In our domestic market, we compete against all airlines that have the same routes, including smaller domestic airlines that have lower operating costs. In the regional and international markets, we compete against international airlines that have significantly longer operating history, better brand recognition, or more resources, such as large sales networks or sophisticated reservation systems. See the section headed “Item 4. Information on the Company — Business Overview — Competition” for more details. The public’s perception of safety of Chinese airlines could also materially and adversely affect our ability to compete against our international competitors. To stay competitive, we have, from time to time in the past, lowered airfares for certain of our routes, and we may continue to do so in the future. Increased competition and pricing pressures may have a material adverse effect on our financial condition and results of operations.

We depend on a limited number of suppliers for aircraft, aircraft engines and parts.

The aviation transportation industry features advanced technology and high operation costs. As a result, the available suppliers for key operating resources including aircraft, engines, flight spare parts, jet fuel and information technology services are limited. We depend on a limited number of suppliers for aircraft, aircraft engines and related parts and components. Due to the limited number of these suppliers, we are vulnerable to any problems associated with the performance of their obligation to supply key aircraft, parts and engines, including design defects, mechanical problems, contractual performance by suppliers, adverse perception by the public that would result in customers’ avoidance of any of our aircraft or any action by the regulatory authorities.

We expect to face substantial competition from the rapid development of the Chinese rail network.

The PRC government is aggressively implementing the expansion of its high-speed rail network, which has provided train services at a speed of up to 350 kilometers per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of rail network, improvements in railway service quality, increased passenger capacity and urban center accessibility could enhance the competitiveness of the railway service and negatively affect our market share on some of our routes, in particular our short-haul routes. For example, Yinchuan-Xi’an and Yancheng-Nantong routes were largely affected by the opening of high-speed railway routes in 2020. The load factors of two routes demonstrated a trend to decrease significantly after the high-speed railway routes put into operation. Increased competition and pricing pressures from the railway service may have a material adverse effect on our business, financial condition and results of operations.

Limitations on foreign ownership of PRC airlines may affect our access to funding in the international equity capital markets or pursuing business opportunities.

The current CAAC policies limit foreign ownership of PRC airlines. Under these rules, non-PRC, Hong Kong, Macau or Taiwan residents cannot hold a majority equity interest in a PRC airline. As of December 31, 2020, approximately 31.6% of our total outstanding shares were held by non-PRC, Hong Kong, Macau or Taiwan residents or legal entities (excluding the qualified foreign institutional investors that are approved to invest in the A Share market of the PRC). As a result, our access to funding in the international equity capital markets may be limited. This restriction may also limit the opportunities available to us to obtain funding or other benefits through the creation of equity-based strategic alliances with foreign carriers. We cannot assure you that the CAAC will not increase these limits on foreign ownership of PRC airlines in the future.

Any jet fuel shortages or any increase in jet fuel prices may materially and adversely affect our financial condition and results of operations.

The availability and prices of jet fuel have a significant impact on our financial condition and results of operations. In the past, jet fuel shortages have occurred in China and, on limited occasions, required us to delay or cancel flights. Although jet fuel shortages have not occurred since the end of 1993, we cannot assure you that jet fuel shortages will not occur in the future. Fuel prices continue to be susceptible to, among other factors, political unrest in various parts of the world, OPEC policies, the rapid growth of the economies of certain countries, including China and India, the inventory levels carried by industries, the amount of reserves built by governments, disruptions to production and refining facilities and weather conditions. Fuel efficiency of our aircraft decreases as they advance in age which results in an overall increase in our aviation fuel costs. The foregoing and other factors that impact the global supply and demand for jet fuel may affect our financial performance due to its sensitivity to fuel prices.

Aircraft fuel prices have been subject to high volatility, fluctuating substantially over the past several years. Setting aside the adjustment in factors such as fuel surcharge, if the average price of jet fuel had increased or decreased by 5%, based on the actual fuel consumption of flights in 2020, our jet fuel costs would have increased or decreased by approximately RMB692 million, our net profit will decrease or increase by approximately RMB519 million and our other comprehensive income will increase or decrease by approximately RMB62 million. In addition, the NDRC adjusts gasoline and diesel prices in China from time to time, taking into account the changes in international oil prices, thereby affecting aviation fuel prices. As such, we cannot assure you that jet fuel prices will not fluctuate further in the future. Due to the highly competitive nature of the airline industry, we may be unable to fully or effectively pass on to our customers any future increase in jet fuel costs.

 

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The airline industry is subject to increasing environmental regulations, which would increase costs and affect profitability.

In recent years, regulatory authorities in China and other countries have issued a number of directives and other regulations to address, among other things, aircraft noise and engine emissions, the use and handling of hazardous materials, aircraft age and environmental contamination remedial clean-up measures. These requirements impose high fees, taxes and substantial ongoing compliance costs on airlines, particularly as new aircraft brought into service will have to meet the environmental requirements during their entire service life.

We have significant expenditures in respect of environmental compliance, which may affect our operations and financial condition. For example, we focused on pollution prevention and control by facilitating the application of new technologies for energy conservation and emission reduction, speeding up the “diesel-to-electric” (replacement of diesel vehicle by electric vehicle) project in airports, and promoting the replacement of Auxiliary Power Unit (APU) on aircraft. We also took measures to reduce the impact of our operations on the environment by optimizing our route network and flight schedules as well as installing energy-saving environmentally friendly engines. In addition, we continue to improve the energy efficiency of our fleet by introducing aircraft with energy-saving technologies, such as A320neo, B787-9 and A350-900 and by retiring old aircraft. However, these measures have resulted in significant costs and expenditures. We expect to continue to incur significant costs and expenditures on an ongoing basis to comply with environmental regulations, which could restrict our ability to modify or expand facilities or continue operations.

Our results of operations tend to be volatile and fluctuate due to seasonality.

The aviation industry is characterized by annual high and low travel seasons. Our operating revenue is substantially dependent on the passenger and cargo traffic volume carried, which is subject to seasonal and other changes in traffic patterns, the availability of appropriate time slots for our flights and alternative routes, the degree of competition from other airlines and alternate means of transportation, as well as other factors that may influence passenger travel demand and cargo and mail volume. As a result, our results tend to be volatile and subject to rapid and unexpected change.

Risks Relating to the PRC

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditor who is located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issues the audit report included in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Without a mutual and practical cooperation mechanism between securities regulatory authorities, it remains uncertain whether and when PCAOB could implement cross-border inspection in the PRC.

There could be additional regulatory or legislative requirements or guidance that could impact us if our auditor is not subject to PCAOB inspection. The implication of possible regulations in addition to the requirements of the HFCAA are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be prohibited from being traded or even delisted.

It is unable for the PCAOB to fully evaluate the audits and quality control procedures of registered public accounting firms in the PRC due to the PCAOB’s inability to conduct inspections in the PRC. As a result, we and our investors are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in PRC makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of PRC that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

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Proceedings instituted by the SEC against certain PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined not to comply with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our then independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to provide the SEC with access to the Chinese firms’ audit documents via the China Securities Regulatory Commission (the “CSRC”). If the firms do not follow these procedures, the SEC could impose sanctions such as suspensions, or it could restart the administrative proceedings. Our audit committee is aware of the policy restriction and regularly communicated with our independent auditor to ensure compliance.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined not to be in compliance with the requirements of the Exchange Act, and possibly delisting of the securities. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based U.S.-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to find another registered public accounting firm in a timely manner to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such determination could ultimately lead to our delisting from the New York Stock Exchange (“NYSE”) or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

It may be difficult for overseas regulators to conduct investigation or collect evidence within China.

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC territory. While detailed interpretation or implementation of rules under this Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests.

Changes in the economic policies of the PRC government may materially affect our business, financial condition and results of operations.

Since the late 1970s, the PRC government has been reforming the Chinese economic system. These reforms have resulted in significant economic growth and social progress. These policies and measures may be modified or revised from time to time. Adverse changes in economic and social conditions in China, in the policies of the PRC government or in the laws and regulations of China, if any, may have a material adverse effect on the overall economic growth of China and investments in and profitability of the domestic airline industry. These developments, in turn, may have a material adverse effect on our business, financial condition and results of operations.

 

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Changes in the foreign exchange regulations in the PRC may result in fluctuations of the Renminbi and adversely affect our ability to pay dividends or to satisfy our foreign currency liabilities.

A significant portion of our revenue and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. The Renminbi is currently freely convertible in the current account, which includes payment of dividends, trade and service-related foreign currency transactions, but not in the capital account, which includes foreign direct investment, unless approval from or registration or filing with the relevant authorities, is obtained. As a foreign invested enterprise approved by the PRC Ministry of Commerce (the “MOFCOM”), we can purchase foreign currencies without the approval of State Administration of Foreign Exchange (the “SAFE”) for settlement of current account transactions, including for the purpose of dividend payment, by providing commercial documents evidencing these transactions. We can also retain foreign currencies in our current accounts, subject to a maximum amount approved by SAFE, to satisfy foreign currency liabilities or pay dividends. The relevant PRC government authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions in the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to raise foreign capital through debt or equity financing, including through loans or capital contributions. We cannot assure you that we will be able to obtain sufficient foreign currencies to pay dividends, if any, or satisfy our foreign currency liabilities.

Furthermore, the value of the Renminbi against the U.S. dollar and other currencies may fluctuate significantly and is affected by, among other things, the PRC government policies, domestic and international economic and political conditions and changes in the supply and demand of the currency. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The Renminbi depreciated 2.0% against the U.S. dollar for the year ended December 31, 2018. The Renminbi depreciated 4.1% against the U.S. dollar for the year ended December 31, 2019. The Renminbi appreciated by appoximately 6.5% against the U.S. dollar for the year ended December 31, 2020. However, it remains unclear what further fluctuations may occur or what impact this will have on the value of the Renminbi. It is possible that the PRC government could adopt a more flexible foreign exchange policy, which could result in further and more significant revaluations of the Renminbi against the U.S. dollar or any other foreign currency. Any resulting fluctuations in exchange rates as a result of such policy changes may have an adverse effect on our financial condition and results of operations.

Our operations may be adversely affected by rising inflation rates in the PRC.

Increase in inflation is due to many factors beyond our control, such as rising production and labor costs, high debts, changes in the PRC and foreign governmental policy and regulations, and movements in exchange rates and interest rates. The national consumer price index, which is an indicator of the inflation, was 2.1%, 2.9% and 2.5% in 2018, 2019 and 2020, respectively. The national consumer price index was -0.3%, -0.2% and 0.4% in January, February and March 2021, respectively. We cannot assure you that inflation rates will not increase in the future. If inflation rates rise beyond our expectations, the costs of our business operations may become significantly higher than anticipated, and we may be unable to pass on such higher costs to consumers in amounts that are sufficient to cover those increasing operating costs. As a result, further inflationary pressures in the PRC may have a material adverse effect on our business, financial condition and results of operations, as well as our liquidity and profitability.

Any withdrawal of, or changes to, tax incentives in the PRC may adversely affect our results of operations and financial condition.

Prior to January 1, 2008, except for a number of preferential tax treatment schemes available to various enterprises, industries and locations, business enterprises in China were subject to an enterprise income tax rate of 33% under the relevant PRC Enterprise Income Tax Law. On March 16, 2007, China passed a new enterprise income tax law, or the EIT Law, which took effect on January 1, 2008 and amended on February 24, 2017 and December 29, 2018. The EIT Law imposes a uniform income tax rate of 25% for domestic enterprises and foreign invested enterprises. Business enterprises enjoying preferential tax treatment that was extended for a fixed term prior to January 1, 2008 will still be entitled to such treatment until such fixed term expires. Certain of our subsidiaries are entitled to preferential tax treatment, allowing us to enjoy a lower effective tax rate that would not otherwise be available to us. To the extent that there are any increases in the applicable effective tax rate, withdrawals of, or changes in, our preferential tax treatment or tax exemptions, our tax liability may increase correspondingly.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to domestic public companies in the United States.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and “short swing” liability for insiders who profit from certain trades; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

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We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterly basis through press releases. Press releases relating to financial results and material events are furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and may be less timely compared with that required to be filed with the SEC by U.S. domestic issuers. As a result, holders of ADSs may not be afforded the same protections or information, which would be made available to them, were they investing in a U.S. domestic issuer.

We are subject to the corporate governance requirements of the NYSE. However, the NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of our home country in lieu of certain NYSE rules. Certain corporate governance practices in the PRC, which is our home country, may differ significantly from the NYSE corporate governance requirements. To the extent we choose to follow home country practice, our shareholders may be afforded less protection than they would otherwise enjoy under the NYSE corporate governance listing standards applicable to U.S. domestic issuers.

Uncertainties embodied in the PRC legal system may limit certain legal protection available to investors.

The PRC legal system is a civil law system based on written statutes. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Legislation over the past 20 years has significantly enhanced the protection afforded to foreign investors in China. However, the interpretation and enforcement of some of these laws and regulations involve uncertainties that may limit the legal protection available to investors. As a result, it may be difficult or impossible for our investors to bring an action against us or our directors and officers in the United States in the event that such investors believe that their rights have been infringed under the U.S. federal securities laws or otherwise. Even if such investors are successful in bringing an action of this kind, the PRC laws may render them unable to enforce a judgment against our assets or the assets of our directors and officers.Such uncertainties pervade as the legal system in the PRC continues to evolve. Even where adequate laws exist in the PRC, the enforcement of the existing laws or contracts may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement, including enforcing a foreign judgment. In addition, the PRC legal system is based on written statutes and their interpretation; prior court decisions may be cited as reference but have limited authority as precedents. As such, any litigation in the PRC may be protracted and result in substantial costs and diversion of our resources and management attention. We have full or majority board control over the management and operation of all of our subsidiaries established in the PRC. The control over these PRC entities and the exercise of shareholder rights are subject to their respective articles of association and PRC laws applicable to foreign-invested enterprises in the PRC, which may be different from the laws of other developed jurisdictions.

The enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC and this may create additional uncertainties as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Furthermore, in case of new laws and regulations, the interpretation, implementation and enforcement of these laws and regulations would involve uncertainties due to the lack of established practice or published court decisions available for reference. We cannot predict the future legal development in the PRC, including promulgation of new laws, changes to existing laws or interpretation or enforcement thereof, or inconsistencies between the local rules and regulations and the national law. As a result, we may not be aware of any violations until sometime after the violation has occurred. This may also limit the remedies available to investors and to us in the event of any claims or disputes with third parties.

Item 4. Information on the Company

A. History and Development of the Company

Our registered office is located at 66 Airport Street, Pudong International Airport, Shanghai, China, 201202. Our principal executive office and mailing address is 5/F, Block A2, Northern District, CEA Building, 36 Hongxiang 3rd Road, Minhang District, Shanghai, China. The telephone number of our principal executive office is (86-21) 6268-6268 and the fax number for the Board Secretariat’s office is (86-21) 6268-6116. We currently do not have an agent for service of process in the United States.

Our Company, China Eastern Airlines Corporation Limited was established on April 14, 1995 under the laws of China as a company limited by shares in connection with the restructuring of our predecessor and our initial public offering. We are commercially known in the industry as China Eastern Airlines. Our predecessor was one of the six original airlines established in 1988 as part of the decentralization of the airline industry in China undertaken in connection with China’s overall economic reform efforts. Prior to 1988, the CAAC was responsible for all aspects of civil aviation in China, including the regulation and operation of China’s airlines and airports. In connection with our initial public offering, our predecessor was restructured into two separate legal entities, our Company and EA Group. According to the restructuring arrangement, by operation of law, our Company succeeded to substantially all of the assets and liabilities relating to the airline business of our predecessor. EA Group succeeded to our predecessor’s assets and liabilities that do not directly relate to the airline operations and do not compete with our businesses. Assets transferred to EA Group included our predecessor’s equity interests in companies engaged in import and export, real estate, advertising, in-flight catering, tourism and certain other businesses. In connection with the restructuring, we entered into various agreements with EA Group and its subsidiaries for the provision of certain services to our Company. CEA Holding assumed the rights and liabilities of EA Group under these agreements after it was formed by merging EA Group, Yunnan Airlines Company and China Northwest Airlines Company in October 2002. See “Item 7. Major Shareholders and Related Party Transactions” for more details.

 

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The following chart sets forth the organizational structure of our Company and our significant subsidiaries as of December 31, 2020:

 

LOGO

In 2020, we took the initiative to confront the COVID-19 pandemic and made every effort to stabilize our operations, striving to reduce the adverse impact of the COVID-19 pandemic. We have closely followed the situation of the COVID-19 pandemic and market changes to dynamically adjust the deployment of transportation capacity, laid a solid foundation in servicing the coordinated development of Beijing-Tianjin-Hebei and the construction of Xiong’an New District and steadily promoted the construction of the core hub of Beijing, and moved our base to Beijing Daxing International Airport as the main base airline as planned. During the outbreak of the COVID-19 pandemic, we launched “Wild Your Dreams”, a series of innovative products, to stimulate passengers’ travel demand, restore market confidence, promote the recovery of the aviation market, effectively serve the internal circulation of China and achieve good economic, social and brand benefits. We also launched the new “Eastern Miles” membership system and introduced the “Eastern Airlines Wallet” enabling “points + cash” payment, so as to increase the ways of using member points. In 2020, we actively expanded financing channels and issued a total of RMB77.2 billion of super short-term debentures and RMB2 billion of corporate bonds to ensure that the cash flow can meet our operation needs.

The material development of our indebtedness is set out in Note 36 to the consolidated financial statements. The capital expenditure is set out in Item 5 in this Annual Report.

The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. We maintain our own website at http://www.ceair.com.

B. Business Overview

We were one of the three largest air carriers in China in terms of several indicators including number of passengers carried, ATK and ASK in 2020 and is an important domestic airline based in and serving Shanghai, which is considered to be the international financial and shipping center of China. The primary focus of our business is the operation of civil aviation, including the provision of passenger, cargo, mail delivery, tour operations and other extended transportation services.

We operate most of our flights through our three hubs located in eastern, northwestern and southwestern China, namely Shanghai, Xi’an and Kunming, respectively. With Shanghai as our core hub and Xi’an and Kunming as our regional hubs, we believe that we will benefit from the level of development and growth opportunities in eastern, northern and western China as a whole by providing direct services between various cities in those regions and between those regions and other major cities in China. We have steadily fostered the construction of a flight system for these core hubs by introducing new flight destinations and increasing the frequency of certain flights, thereby enhancing our transfer and connection capability in these hub markets. With the commencement of operation of Beijing Daxing International Airport in 2019, Beijing Daxing International Airport also becomes one of our core hubs. With dual core hubs in both Shanghai and Beijing, we believe that we are better positioned to further strengthen our hub network and accommodate market demands.

 

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Our domestic routes contributed approximately 82.0% of our total passenger revenues in 2020. Our most heavily traveled domestic routes generally link Shanghai to the large commercial and business centers of China, such as Beijing, Guangzhou and Shenzhen. Our flight routes include all provincial capital cities in China and specifically designated cities. As of December 31, 2020, we served a route network that covers 1,036 domestic and foreign destinations in 170 countries through SkyTeam, an international airlines alliance.

Our passenger traffic volume (as measured in revenue passenger-kilometers, or RPKs) decreased by 51.6% from approximately 221,779 million in 2019 to approximately 107,273 million in 2020. Our cargo and mail traffic volume (as measured in revenue freight tonne-kilometers, or RFTKs) decreased by 26.0% from approximately 2,971 million in 2019 to approximately 2,200 million in 2020. As a result, our traffic volume (as measured in RTKs) decreased by 48.0% from approximately 22,518 million in 2019 to approximately 11,700 million in 2020.

Awards

We have received many awards, recognitions and accolades through the years.

In 2020, we withstood the challenges brought by the COVID-19 pandemic and achieved constructive results. At the National Commendation Conference for Fighting the COVID-19 Pandemic in 2020, we were awarded honorary titles including “National Advanced Group in Fighting the COVID-19 Pandemic”, “National Advanced Individual in Fighting the COVID-19 Pandemic” and “National Advanced Primary Party Organisation”, and was awarded the most number of national-level advanced commendations for the COVID-19 pandemic prevention among entities in the civil aviation system in China. In 2020, we were selected as the “2020 Golden Bee Corporate Social Responsibility • China List” for our outstanding performance in social responsibility and were rated as “Golden Bee Enterprise”; MSCI assigned us an ESG rating of A.

Our Operations by Activity

The following table sets forth our traffic revenues by activity for each of the years ended December 31, 2018, 2019 and 2020:

 

     Year Ended December 31,  
     2018      2019      2020  
     (in RMB millions)  

Traffic revenues

        

Passenger

     104,309        110,416        49,215  

Cargo and mail

     3,627        3,826        4,895  

Total traffic revenues

     107,936        114,242        54,110  

Passenger Operations

The following table sets forth our certain passenger operating statistics by route for each of the years ended December 31, 2018, 2019 and 2020:

 

     Year Ended December 31,  
     2018      2019      2020  

Passenger Traffic (in RPKs) (millions)

     201,486        221,779        107,273  

Domestic

     128,906        142,921        96,206  

Regional (Hong Kong, Macau and Taiwan)

     5,289        5,046        458.0  

International

     67,290        73,812        10,609  

Passenger Capacity (in ASKs) (millions)

     244,841        270,254        152,066  

Domestic

     154,059        171,684        134,702  

Regional (Hong Kong, Macau and Taiwan)

     6,374        6,408        902  

International

     84,408        92,162        16,463  

Passenger Yield (RMB)

     0.54        0.52        0.49  

Domestic

     0.56        0.54        0.46  

Regional (Hong Kong, Macau and Taiwan)

     0.73        0.74        0.90  

International

     0.49        0.47        0.82  

Passenger Load Factor (%)

     82.29        82.06        70.54  

Domestic

     83.67        83.25        71.42  

Regional (Hong Kong, Macau and Taiwan)

     82.99        78.75        50.79  

International

     79.72        80.09        64.44  

 

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In 2018, our fleet size, number of flights and number of users with “in-flight internet connection” ranked the first in China. We actively sought to establish an in-flight internet joint venture with telecom operators to reinforce and enhance our first-mover advantage in the inflight internet connection business. We continuously optimized the customers’ experience on our official website and mobile application, added and optimized important functions such as pre-flight ordering of in-flight meals and publication of information regarding unusual flights. We have vigorously promoted the establishment of overseas e-commerce platform, launched 14 new overseas websites and introduced value-added products such as oversized baggage check-in, VIP lounges and online seat selection. We strengthened the operation of points mall, enriched point redemption products, and optimized the points payment function.

In 2018, we introduced a total of 67 aircraft of major models and a total of 14 aircraft retired. With the introduction of new aircraft, such as A350-900, B787-9 and A320NEO, and the retirement of B767 aircraft, our fleet age has been made younger. As of December 31, 2018, we operated a fleet of 692 aircraft, which included 680 passenger aircraft and 12 business aircraft held under trust. We continuously intensified our cooperation with strategic partners to enrich the contents for cooperation and enhance the quality of cooperation. Delta Air Lines and we continued to intensify bilateral cooperation in four aspects, namely, revenue from cooperation (including mutual sales revenue and revenue from SPA (special allocation agreements)), experience of travelers, communication between personnel and cooperation for expansion and development. We entered into a new cooperation agreement with Air France-KLM, pursuant to which, additional routes such as Kunming-Paris and Wuhan-Paris were operated jointly commencing from January 1, 2019. We worked with Delta Air Lines and Air France-KLM to carry out the plan for network optimization connection, as well as ground service and procedure standards for Beijing Daxing International Airport. By entering into a comprehensive and upgraded business agreement with Qantas Airways Limited, we intensified the business partnership of both parties based on the original joint partnership. We has signed a joint cooperation agreement with Japan Airlines Co., Ltd. (“Japan Airlines”), and both parties are performing the relevant anti-monopoly legal procedures of China and Japan.

In 2018, our market share (in terms of passenger throughput) in hubs such as Shanghai, Beijing and Kunming increased by 0.6, 0.4 and 0.8 percentage point, respectively, while our market share in Xi’an remained the same year-on-year. Through the optimization of transit connection, the effect of hub network has gradually appeared. In respect of the number of transits connecting “origin to destination”, Pudong reached 4,614, representing an increase of 9.2% as compared to 2017; Kunming reached 1,793, representing an increase of 11.5% as compared to 2017; Xi’an reached 739, representing an increase of 12.7% as compared to 2017; and Beijing reached 751, representing an increase of 1.0% as compared to 2017.

In 2018, we put in available seat – kilometers (ASK) of approximately 244,841 million passenger-kilometers, representing an increase of approximately 8.3% from 2017. Number of passengers carried in 2018 was approximately 121 million, representing an increase of approximately 9.4% from 2017. Passenger load factor in 2018 was approximately 82.3%, representing an increase of approximately 1.2 percentage points from 2017. Passenger revenue in 2018 amounted to approximately RMB104,309 million, representing an increase of approximately 13.9% from 2017.

In 2019, we introduced a total of 44 aircraft of major models and one aircraft retired. With the introduction of new aircraft, such as A350-900, B787-9 and A320NEO, our fleet age structure has remained young. As of December 31, 2019, we operated a fleet of 734 aircraft, which included 723 passenger aircraft and 11 business aircraft held under trust. We have intensified our comprehensive cooperation with strategic partners and core partners to improve the capacity of international routes and enhance the quality of cooperation. For the core markets of Shanghai and Beijing, leveraging on the operation of the satellite terminal S1 of Shanghai Pudong International Airport (the “Satellite Terminal S1 of Pudong”) and Beijing Daxing International Airport, we worked with SkyTeam Airline Alliance members and other important partners to carry out the plan for route network optimization connection, as well as the development of ground service procedure and standards, explore ground operating cooperation opportunities, design passenger travel plan portfolio products and continue to expand the scope of code-sharing. As of the end of 2019, our codesharing covered 347 flight route destinations, 1,007 routes and 4,617 flights. For the North American market, we and Delta Air Lines started to operate in the same terminal in Satellite Terminal S1 of Pudong and recorded increase in revenue from cooperation. For the European market, we have expanded joint operation routes with Air France-KLM by adding new routes from Kunming and Wuhan to Paris, and intensified the cooperation in the aspects such as transfer mode of connected flights, corporate clients and joint sales. For the Australian market, our in-depth cooperation with Qantas Airways Limited in the areas of code-sharing, allocation of flight capacity, joint marketing, resources sharing and personnel exchange has driven the growth in mutual sales revenue from cooperation. For the Asia Pacific market, we continued to facilitate the anti-monopoly approval procedures for the joint cooperation with Japan Airlines and deepened the cooperation in the areas of route network and flight capacity sharing with Japan Airlines to strengthen our market position in Japan routes.

In 2019, we have focused on the core hubs of Beijing and Shanghai, and the regional hubs such as Xi’an and Kunming to continuously optimize our route network layout and flight capacity allocation so as to strengthen the our market share and influence. In 2019, our market shares in hubs such as Shanghai, Beijing, Kunming and Xi’an were 40.6%, 18.3%, 37.2% and 29.4%, respectively. Through the scientific matching of routes and flight capacity and the optimization of transit connection procedures, the effect of hub network has gradually appeared. The number of transits connecting “origin to destination” of the three hubs, namely Shanghai Pudong, Xi’an and Kunming, significantly increased by 11.6%, 34.4% and 9.9%, respectively. The transit passengers of the three hubs, namely Shanghai Pudong, Kunming, and Xi’an amounted to 3,488,000 passengers, 1,658,000 passengers and 580,000 passengers, respectively, representing a year-on-year increase of 11.1%, 3.0% and 7.8%, respectively.

In 2019, we put in available seat – kilometers (ASK) of approximately 270,254 million passenger-kilometers, representing an increase of approximately 10.4% from 2018. Number of passengers carried in 2019 was approximately 130 million, representing an increase of approximately 7.5% from 2018. Passenger load factor in 2019 was approximately 82.06%, remaining relatively stable as compared to 2018. Passenger revenue in 2019 amounted to approximately RMB110,416 million, representing an increase of approximately 5.9% from 2018.

 

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In 2020, we introduced a total of 13 aircraft of major models and a total of 11 aircraft retired. With the introduction of new aircraft, such as A350-900, B787-9 and A320NEO, our fleet age structure still continues to remain young. As of December 31, 2020, we operated a fleet of 734 aircraft, which included 725 passenger aircraft and nine business aircraft held under trust.

In 2020, we have closely followed the situation of the COVID-19 pandemic and market changes to dynamically adjust the deployment of transportation capacity. To improve our route network and the establishment of our core hubs, we paid special attention to adjusting our capacity; we paired core hubs and important business cities with more wide-body aircraft; we optimized our route network layout and focused on the construction of express and quasi express routes in key markets; we continued to faciliate the construction of the core hub of Beijing and moved our base to Beijing Daxing International Airport; we steadily promoted construction of hubs in important business markets such as Chengdu, Qingdao and Wuhan.

Due to the adverse impact of the COVID-19 pandemic, our production volume, revenue, profit and other indicators all dropped significantly. In 2020, our passenger revenue amounted to RMB49,215 million, representing a decrease of 55.4% from last year, and accounted for 91.0% of our traffic revenue. The passenger traffic volume was 107,273 million passenger-kilometres, representing a decrease of 51.6% from last year. Meanwhile, our cargo traffic revenues amounted to RMB4,895 million, representing an increase of 27.9% from last year, and accounted for 9.0% of our traffic revenue. The cargo and mail traffic volume was 2,200 million tonne-kilometres, representing a decrease of 26.0% from last year. Our other revenue amounted to RMB4,617 million, representing a decrease of 31.5% from last year.

Cargo and Mail Operations

We also provide air cargo and mail services. The following table sets forth certain of our cargo and mail operations statistics by route for each of the years ended December 31, 2018, 2019 and 2020:

 

     Year Ended December 31,  
     2018      2019      2020  

Cargo and Mail Traffic (in RFTKs)

     2,588        2,971        2,200  

(millions)

        

Domestic

     886        951        774  

Regional (Hong Kong, Macau and Taiwan)

     35        29        9  

International

     1,667        1,991        1,416  

Cargo and Mail Capacity (in AFTKs)

     7,901        9,133        6,946  

(millions)

        

Domestic

     2,741        3,216        2,755  

Regional (Hong Kong, Macau and Taiwan)

     191        189        42  

International

     4,969        5,728        4,150  

Cargo and Mail Yield (RMB)

     1.40        1.29        2.23  

Domestic

     1.12        1.05        0.97  

Regional (Hong Kong, Macau and Taiwan)

     5.57        5.56        8.91  

International

     1.47        1.34        2.87  

Cargo and Mail Load Factor (%)

     32.76        32.54        31.67  

Domestic

     32.33        29.58        28.11  

Regional (Hong Kong, Macau and Taiwan)

     18.39        15.21        22.45  

International

     33.55        34.77        34.13  

China Cargo Airlines has exclusive operation to independently operate and manage our passenger aircraft cargo business.

Our Operations by Geographical Area

Our revenues (net of business tax) by geographical area are analyzed based on the following criteria:

 

  (1)

Traffic revenue from services within the PRC (excluding Hong Kong Special Administrative Region (“Hong Kong”), Macau Special Administrative Region (“Macau”) and Taiwan, (collectively known as “Regional”)) is classified as domestic operations. Traffic revenue from inbound and outbound services between overseas markets excluding Regional is classified as international operations.

  (2)

Revenue from ticket handling services, ground services, cargo handling service and other miscellaneous services is classified based on where the services are performed.

 

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The following table sets forth our revenues by geographical area for each of the three years ended December 31, 2020:

 

     2018      2019      2020  
     (in RMB millions)  

Domestic

     76,517        80,058        45,479  

Regional (Hong Kong, Macau and Taiwan)

     4,017        3,846        489  

International

     34,744        37,082        12,759  

Total

     115,278        120,986        58,727  

Regulation

The PRC Civil Aviation Law provides the framework for regulation of many important aspects of civil aviation activities in China, including:

 

  (1)

the administration of airports and air traffic control systems;

 

  (2)

aircraft registration and aircraft airworthiness certification;

 

  (3)

operational safety standards; and

 

  (4)

the liabilities of carriers.

The Chinese airline industry is also subject to a high degree of regulation by the CAAC. Regulations issued or implemented by the CAAC encompass virtually every aspect of airline operations, including route allocation, domestic airfare, licensing of pilots, operational safety standards, aircraft acquisition, aircraft airworthiness certification, fuel prices, standards for aircraft maintenance and air traffic control and standards for airport operations. Although the PRC airlines operate under the supervision and regulation of the CAAC, they are accorded a significant degree of operational autonomy. These areas of operational autonomy include:

 

   

whether to apply for any route;

 

   

the allocation of aircraft among routes;

 

   

the airfare pricing for the international and regional passenger routes;

 

   

the airfare pricing within the limit provided by the CAAC for the domestic passenger routes;

 

   

the acquisition of aircraft and spare parts;

 

   

the training and supervision of personnel; and

 

   

many other areas of day-to-day operations.

Although we have generally been allocated adequate routes in the past to accommodate our expansion plans and other changes in our operations, those routes are subject to allocation and re-allocation in response to changes in governmental policies or otherwise at the discretion of the CAAC. Consequently, we cannot assure you that our route structure will be adequate to satisfy our expansion plans.

The CAAC has established regulatory policies intended to promote controlled growth of the Chinese airline industry. We believe those policies will be beneficial to the development of and prospects for the Chinese airline industry as a whole. Nevertheless, those regulatory policies could limit our flexibility to respond to changes in market conditions, competition or our cost structure. Moreover, while we generally benefit from regulatory policies that are beneficial to the airline industry in China as a whole, the implementation of specific regulatory policies may from time to time materially and adversely affect our business operations.

Because we provide services on international routes, we are also subject to a variety of bilateral civil air transport agreements between China and other countries. In addition, China is a contracting state as well as a permanent member of the International Civil Aviation Organization, an agency of the United Nations established in 1947 to assist in the planning and development of the international air transportation. The International Civil Aviation Organization establishes technical standards for the international airline industry. China is also a party to a number of other international aviation conventions. Our business operations are also subject to these international aviation conventions, as well as certain foreign country aviation regulations and local aviation laws with respect to route allocation, landing rights and related flight operation regulation.

 

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Domestic Route Rights

Chinese airlines must obtain from the CAAC the right to carry passengers or cargo on any domestic route. The CAAC’s policy on domestic route rights is to assign routes to the airline or airlines suitable for a particular route. The CAAC will take into account whether an applicant for a route is based at the point of origin or termination of a particular route. This policy benefits airlines, such as us, that have a hub located at each of the active air traffic centers in China. The CAAC also considers other factors that will make a particular airline suitable for an additional route, including the applicant’s safety record, previous on-time performance and level of service and availability of aircraft and pilots. The CAAC will consider the market conditions applicable to any given route before such route is allocated to one or more airlines. Generally, the CAAC will permit additional airlines to service a route that is already being serviced only when there is strong demand for a particular route relative to the available supply. The CAAC’s current general policy is to require the passenger load factor of one or two airlines on a particular route to reach a certain level before another carrier is permitted to commence operations on such route.

Regional Route Rights

Hong Kong routes and the corresponding landing rights were formerly derived from the Sino-British air services agreement. In February 2000, the PRC government, acting through the CAAC, and Hong Kong signed the Air Transportation Arrangement between mainland China and Hong Kong. The Air Transportation Arrangement provides equal opportunity for airlines based in Hong Kong and mainland China. Competition from airlines based in Hong Kong increased after the execution of the Air Transportation Arrangement. The CAAC normally will not allocate an international route or a Hong Kong route to more than one domestic airline unless certain criteria, including minimum load factors on existing flights, are met. There is more than one Chinese airline company on certain of our Hong Kong routes.

The CAAC and the Economic Development and Labor Bureau of Hong Kong entered into an agreement in 2007 to further expand the Air Transportation Arrangement. This agreement increases the routes between Hong Kong and mainland China to expand coverage to most major cities in mainland China. The capacity limits for passenger and/or cargo services on most routes will also be gradually lifted. Beginning in 2007, each side designated three airline companies to operate passenger and/or cargo flights and another airline company to operate all-cargo flights on the majority of the routes between Hong Kong and mainland China. Since then, the two sides signed memorandums to further expand the Air Transportation Arrangement several times.

On December 15, 2008, mainland China and Taiwan commenced direct air and sea transport and postal services, ending a nearly six-decade ban on regular links between the two sides since 1949. Under a historic agreement signed by the governments of mainland China and Taiwan in early November 2008, the new air links expanded from weekend charters to a daily service. According to the flight plan of 2019-2020 winter and spring season of CAAC, the total number of flights between mainland China and Taiwan reached 1,320 per week.

International Route Rights

International route rights, along with the corresponding landing rights, are derived from air services agreements negotiated between the PRC government, acting through the CAAC, and the government of the relevant foreign country. Each government grants to the other the right to designate one or more domestic airlines to operate scheduled services between certain points within each country. The CAAC awards the relevant route to an airline based on various criteria, including:

 

  (1)

availability of appropriate aircraft and flight personnel;

 

  (2)

safety record;

 

  (3)

on-time performance; and

 

  (4)

hub location.

Although hub location is an important criterion, an airline may be awarded a route that does not originate from an airport where it has a hub.

The route rights awarded do not have a fixed expiry date and can be terminated at the discretion of the CAAC.

Airfare Pricing Policy

The PRC Civil Aviation Law provides that airfares for domestic routes are determined jointly by the CAAC and the agency of the State Council responsible for price control, primarily based upon average airline operating costs and market conditions.

 

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The CAAC and NDRC jointly issued a notice on April 13, 2010, effective on June 1, 2010, pursuant to which airlines may set first-class and business-class airfares in accordance with market prices, subject to relevant PRC laws. Such pricing must be filed 30 days before effectiveness with the CAAC and NDRC. Efforts by the Chinese regulators to promote a sale market with fair competition will also help provide a favorable environment for our business growth.

At the end of 2014, the CAAC and the NDRC jointly promulgated The Notice on Further Improving the Problems About Civil Aviation Domestic Air Transport Price Policy, which lifted the control over the civil domestic airlines cargo freight rate and changed the prices of specific airlines from government-oriented pricing to market-oriented pricing.

At the end of 2015, the CAAC announced the Implementation Opinion on the Reform of Mechanism of Prices and Service Fee in Civil Aviation Transport, which sets the goal to generally lift the control over the prices and service fee in competitive part of civil aviation transport by 2017, and to generally set up a basically optimized, scientific, standardized, transparent and market-oriented pricing regulatory system by 2020.

In October 2016, the CAAC and the NDRC jointly promulgated the Circular on the Further Reform of Passenger Transport Price Policy in Civil Aviation Domestic Air Transport, which loosened the control over the civil domestic airlines passenger transportation and changed the prices from government-oriented pricing to market-oriented pricing. According to the circular, the price of routes under 800km or routes above 800km that are in competition with high-speed rails for passenger transportation can be determined independently.

At the end of 2017, the CAAC and the NDRC jointly promulgated the Notice on Further Improving the Problems about Passenger Transport Price Policy in Civil Aviation Domestic Air Transport, given greater freedom to set fares on more domestic routes.

On April 13, 2018, the CAAC issued the Notice on the Issuance of Domestic Route Directory with Market-adjusted Prices showing a total of 1,030 domestic routes implementing market adjusted ticket prices.

On November 23, 2020, the Civil Aviation Authority and the National Development and Reform Commission, jointly issued a Notice on Issues Related to Further Deepening the Reform of Transport Prices on Domestic Routes of Civil Aviation, which may greatly increase the volume of market-adjusted domestic routes, and the market price-determining mechanism may be further strengthened.

Under the PRC Civil Aviation Law, maximum airfares on regional and international routes are set in accordance with the terms of the air services agreements pursuant to which these routes are operated. In the absence of an air services agreement, airfares are set by the airlines themselves or by the CAAC with reference to comparable market prices, taking into account the international airfare standards established through the coordination of the International Air Transport Association, which organizes periodic air traffic conferences for coordinating international airfares. Discounts are permitted on regional and international routes. For the airline industry in China as a whole, the airfare per kilometer is substantially higher for regional and international routes than that for domestic routes.

Acquisition of Aircraft and Spare Parts

We are permitted to import aircraft, aircraft spare parts and other equipment for our own use from manufacturers through Eastern Aviation Import and Export Co., Ltd., or EAIEC, which is 55% owned by CEA Holding and 45% owned by our Company. This gives us a sale market with fair competition flexibility with our inventory management by allowing us to maintain a relatively lower overall inventory level of aircraft parts and equipment than we otherwise would have to maintain. We are still required to obtain approval from the NDRC and may be subject to appraisal of the relevant competent authorities for any import of aircraft. We generally pay a commission to EAIEC in connection with these imports.

Domestic Fuel Supply and Pricing

The Civil Aviation Oil Supply Company, or the CAOSC, which is supervised by the State-owned Assets Supervision and Administration Commission of the State Council, or the SASAC, is currently the dominant civil aviation fuel supply company in China. We currently purchase a significant portion of our domestic fuel supply from CAOSC. The PRC government determines the fuel price at which the CAOSC acquires fuel from domestic suppliers and the CAAC issues a guidance price. The retail price at which the CAOSC resells fuel to airline customers is set within a specified range based on this guidance price.

 

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In 2005, the NDRC, the CAAC and the China Air Transport Association jointly launched the linkage mechanism for aviation fuel prices and transportation prices by airline companies. The fuel surcharge standards for domestic passenger routes were adjusted according to a series of notices regarding the adjustments of passenger fuel surcharges on domestic routes issued by the NDRC and the CAAC from 2006 to 2008. In the second half of 2008, international crude oil prices decreased significantly, leading the NDRC and the CAAC to release an announcement on January 14, 2009 to suspend fuel surcharges for domestic passenger routes with effect from January 15, 2009. A Notice Concerning the Relevant Issues on Establishment Linkage Mechanism for Passenger Fuel Surcharges on Domestic Routes and the Price of Domestic Aviation Coal Oil Fuel by NDRC and CAAC, with effect from November 14, 2009, provided that fuel surcharges shall be charged by the airlines, at the airline’s discretion, but within certain limits as set forth in the notice. On March 31, 2010, the NDRC and CAAC issued the Notice Regarding the Publication of Passenger Fuel Surcharges Rate on Domestic Routes, which reduced the standard fuel surcharge by 3.1% for domestic routes. In addition, on March 31, 2011, the NDRC and CAAC issued another similar notice, which further adjusted the standard fuel surcharge downwards. From August 1, 2011, according to the Announcement on the Linking Mechanism for Fuel Surcharges and Aviation Coal Oil Fuel, issued by the NDRC and CAAC, the rate of domestic route fuel surcharges will be adjusted each month if the difference in consolidated purchase costs for domestic aviation coal oil fuel exceeds RMB250 per ton.

On March 24, 2015, the CAAC and the NDRC jointly promulgated the Notice on Adjustment of the Linking Mechanism for Fuel Surcharges and Aviation Coal Oil Fuel in Passenger Transport of Domestic Airlines, in which they decided to increase the base price of aviation coal oil fuel from RMB4,140 per ton to RMB5,000 per ton.

Safety

The CAAC has made the continuance of improvement of air traffic safety in China a high priority. The CAAC is responsible for the establishment of operational safety, maintenance and training standards for all Chinese airlines, which have been formulated based on international standards. Each Chinese airline is required to provide flight safety reports to the CAAC, including reports of flight incidents or accidents involving its aircraft, which occurred during the relevant reporting period and other safety related problems. The CAAC conducts safety inspections on each airline periodically.

The CAAC oversees the training of most Chinese airline pilots through its operation of the pilot training college. The CAAC implements a unified pilot certification process applicable to all Chinese airline pilots and is responsible for the issuance, renewal, suspension and cancelation of pilot licenses. Each pilot is required to pass the CAAC-administered examinations before obtaining a pilot license and is subject to an annual examination in order to have such certification renewed.

All aircraft operated by Chinese airlines, other than a limited number of leased aircraft registered in foreign countries, are required to be registered with the CAAC. All of our aircraft are registered with the CAAC. All aircraft operated by Chinese airlines must have a valid certificate of airworthiness issued and annually renewed by the CAAC. In addition, maintenance permits are issued to a Chinese airline only after the maintenance capabilities of that Chinese airline have been examined and assessed by the CAAC. These maintenance permits are renewed annually. All aircraft operated by Chinese airlines may be maintained and repaired only by CAAC certified maintenance facilities, whether located within or outside China. Aircraft maintenance personnel must be certified by the CAAC before assuming aircraft maintenance posts.

In early 2013, the CAAC amended the original Civil Aviation Incidents Standards and published the new Civil Aviation Incidents Standards which became effective as of March 1, 2013. The CAAC amended the Management Rules on Safety Information of Civil Aviation which became effective on April 4, 2016 and required that related Chinese airlines should arrange a certain number of specialists that satisfied with special requirements to take charge of the management of safety information. The CAAC promulgated the new Administrative Provisions on Emergencies of China’s Civil Aviation which became effective from April 17, 2016 and formulated the duties and responsibilities of Chinese airlines on the prevention and emergency preparedness, prediction and early warning, emergency disposal, handling and other emergency work of civil aviation. We will ensure our relevant employees implement the new standards, which will enable us to enhance our daily operations. For more information on the safety standards and measures implemented by us, see “– Maintenance and Safety – Safety.” In 2016, the CAAC promulgated the new Administrative Provisions on Civil Aviation Safety Information. As a result, we formulated new internal regulations on aviation safety information to strengthen the safety of our information system.

Security

The CAAC establishes and oversees the implementation of security standards and regulations based on the PRC laws and standards established by international civil aviation organizations. Each airline is required to submit to the CAAC an aviation security handbook describing specific security procedures established by the airline for the day-to-day operations and security training for staff. Such security procedures must be formulated based on the relevant CAAC regulations. Chinese airlines that operate international routes must also adopt security measures in accordance with the requirements of the relevant international agreements and applicable local laws. We believe that we comply with all applicable security regulations.

 

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Environmental Regulation

We are subject to a number of environmental laws and regulations issued by regulatory authorities in China including the Environment Protection Law of the PRC, the Prevention and Control of Noise Pollution Law of the PRC, the Environmental Protection Tax Law of the PRC, Implementing Regulations of Environmental Protection Tax Law of the PRC and Implementation Opinions on Further Promoting the Green Development of Civil Aviation. We believe that we comply with all applicable noise and environmental regulations in material aspects.

Chinese Airport Policy

Prior to September 2003, all civilian airports in China were operated directly by the CAAC or by provincial or municipal governments. In September 2003, as part of the restructuring of the aviation industry in China, the CAAC transferred 93 civilian airports to provincial or municipal governments. The CAAC retained the authority to determine the take-off and landing charges, as well as charges on airlines for the use of airports and airport services. Prior to 2004, Chinese airlines were generally required to collect from their passengers on behalf of the CAAC a levy for contribution to the civil aviation infrastructure fund, which was used for improving China’s civilian airport facilities. Our revenue for the previous years is shown net of this levy. In 2003, the levy was 5% of domestic airfares and 2% of international airfares. The levy was waived by the CAAC from May 1, 2003 to December 31, 2003. With effect from September 2004, the civil aviation infrastructure levies, now paid to the Ministry of Finance of the PRC (“MOF”), have been reflected in airfares of Chinese airlines rather than collected as a separate levy.

On December 28, 2007, the CAAC and the NDRC released the Implementing Scheme for the Civil Aviation Airport Charges Reform Implementation Plan, which was implemented on March 1, 2008. This new plan divides airport charges into three parts: charges related to airline businesses; charges related to important non-airline items; and other non-airline charges. The charges related to airline businesses and important non-airline items must follow the national guided prices, in which the standard prices are rarely increased, while reduced rates can be negotiated between the airport or the service provider and the users. The plan grants us the right to negotiate with airports on the airport charges. On January 23, 2017, CAAC promulgated the Notice of Distributing the Adjustment Plan for Charging Standards for Civil Airport, adjusting the general aviation fee policy and the preferential policy for passenger service fees, including but not limited to the categories, meanings, management methods, benchmark prices and floating ranges of several airport charges and take-off and landing fees. On May 28, 2019, the CAAC issued Notice on Issues Related to Civil Airport Charging, which lowered the charging standards for some airport charging items.

Limitation on Foreign Ownership

The CAAC’s present policies limit foreign ownership in Chinese airlines. Under these limits, non-Chinese residents and Hong Kong, Macau or Taiwan residents cannot hold a majority of our total outstanding shares individually or together. For PRC air transportation companies, pursuant to the Special Administrative Measures for Foreign Investment Access (Negative List) (2020 Edition), Chinese investors should be the controlling shareholders of a PRC public air transportation company and the total shares held by foreign investment enterprises and its associated enterprises are not permitted to exceed 25% of the total shares of a PRC public air transportation company.

Domestic Investment

According to the Regulations on Domestic Investment in Civil Aviation Industry issued by the Ministry of Transport of PRC and effected on January 19, 2018, public air transport companies that require special management for domestic investment can keep a relative state-owned holding in its equity structure. The state-owned shares ratio requirement of major civil transport airports is loosened. Moreover, investment restrictions among various entities in the civil aviation industry are further liberalized.

Competition

Domestic

We compete against our domestic competitors primarily based on safety, quality of service and frequency of scheduled flights. With the combination of our dominant position in Shanghai, our route network and our continued commitment to safety and service quality, we believe that we are well-positioned to compete against our domestic competitors in the growing airline industry in China. However, domestic competition from other Chinese airlines has been increasing recently as our competitors have increased capacity and expanded operations by adding new routes or additional flights to existing routes and acquiring other airlines. In addition, we have faced intense competition from entrants to our domestic markets as new investments into China’s civil aviation industry have been made following the CAAC’s relaxation of certain private-sector investment rules in July 2005. In December 2008, the CAAC announced ten measures to protect and encourage the domestic aviation industry, one of which provides that no new Chinese airlines will be licensed to incorporate and operate aviation businesses before 2010. In October 2010, the CAAC announced that the suspension of approvals for new Chinese airlines companies would continue for an indefinite period. However, if the restriction is lifted in the future, we expect that competition from other Chinese airlines on our routes will further intensify.

 

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There are currently approximately 50 Chinese airlines in mainland China, and we compete with many of them on various domestic routes. All of these airlines operate under the regulatory supervision of the CAAC. Our Company, Air China Limited, or Air China, which is based in Beijing and listed on the Hong Kong Stock Exchange (“HKEX”) and the London Stock Exchange, and China Southern Airlines Company Limited, or China Southern, which is based in Guangzhou and listed on the HKEX and the NYSE, are the three leading air carriers in China.

Each of the domestic airlines competes against other airlines operating the same routes or flying indirect routes to the same destinations. Our principal competitors in the domestic market are China Southern and Air China, which also provide transportation services on some of our routes, principally routes originating from the major air transportation hubs in China, such as Shanghai, Guangzhou and Beijing. Some of these routes are among our most heavily traveled routes. Since most of the major domestic airlines operate routes from their respective hubs to Shanghai, we also compete against virtually all of the major domestic airlines on these routes. In addition, we are facing increasing competition from certain low-cost carriers, such as Spring Airlines, in the domestic market. Spring Airlines competes with us, as it operates daily domestic routes to certain destinations such as Harbin, Shenyang, Guangzhou, Xiamen, Sanya, Kunming and Chongqing, which are covered in our domestic routes. The “Twelfth Five-Year Plan” for civil aviation industry in China encourages low-cost airlines to enter into major logistics market gradually. In February 2014, CAAC issued Guidance on Facilitating Low-cost Aviation Development which aims at supporting the development of domestic low-cost airlines. This will further intensify the competition in domestic aviation market. However, we believe we are well-positioned to compete against domestic low-cost carriers due to our expansive route network, competitive pricing, greater availability of flight services to these destinations and strong brand name.

Domestic Rail

The PRC government is aggressively implementing the expansion of its domestic high-speed rail network, which has provided train services at speeds of up to 350 km per hour connecting major cities such as Beijing, Shanghai, Guangzhou and Hong Kong. The expansion of rail network, improvements in railway service quality, increased passenger capacity and urban center accessibility could enhance the competitiveness of the railway service and negatively affect our market share on some of our routes, in particular our short-haul routes. For example, in 2020, Yinchuan-Xi’an and Yancheng-Nantong routes were largely affected by the opening of high-speed railway routes. The load factors of two routes demonstrated a trend of significant decrease after the high-speed railway routes put into operation.

We have been taking active measures in decreasing the number of short-haul routes that overlap with high-speed train routes, as well as adjusting certain airfare prices on affected routes, facilitating “air-to-railway” transfers, adjusting the flight structure, and allocating flight resources to alternative routes or medium-to-long-haul routes that have higher profitability, higher demand and lessened competition. In addition, in 2013, we developed ground connection services such as Air-Rail Service and Air-Bus Service and cooperated with Disney, brand hotel groups, and renowned international travel enterprises to develop travel products. Our Air-Rail Service and Air-Bus Service have been developing steadily with increased routes in Yangtze River Delta, Xi’an, Lanzhou and other cities and regions. We expect to continue exploring cooperation opportunities with domestic railway authorities, while maintaining and strengthening our other competitive advantages, which include providing high quality services, increasing our pre-sale product promotions and developing our transfer services. In 2020, we cooperated with China National Railway Group Co., Ltd. to open a new era of “air-rail combined transportation” by linking the system of the CEA APP and Railway 12306 APP and providing one-stop joint booking of “aircraft + high-speed rail”, thereby offering passengers with more convenient one-stop services.

Regional

Our Hong Kong routes were highly competitive before the outbreak of the COVID-19 pandemic. We operated approximately 20 flight routes between various cities in mainland China and Hong Kong in 2019. The primary competitors on our Hong Kong routes were Cathay Pacific Airways (“Cathay”) and HongKong Airlines. Cathay and HongKong Airlines compete with us on several of these routes, particularly the Shanghai-Hong Kong route. In addition, we continue to face competition from other low-cost airlines on overlapping routes connecting Hong Kong and mainland cities. The Air Transportation Arrangement signed between the PRC government and the administrative government of Hong Kong in February, 2000 provides for equal opportunity for airlines based in Hong Kong and mainland China. We currently operate one flight route between mainland China and Hong Kong.

The policy restraint on direct flights between Taiwan and mainland China has been further loosened in the past few years but there has been no further negotiation on the expansion of such arrangement between Taiwan and mainland China since mid-2016. However, given the arrangement is subject to the political relationship between Taiwan and mainland China, any deterioration in such political relationship may cause the discontinuity or disruption in the flight arrangement. As one of the several airlines offering Taiwan-mainland China direct flight services, we cannot assure you that we will maintain or will continue to be allocated sufficient Taiwan-mainland China routes, or our results will not be adversely impacted. We compete with China Airlines, China Southern and Eva Air on our route connecting mainland cities and Taiwan. We currently operate one flight to Taipei from mainland China.

 

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We compete with Air Macau on the Shanghai Pudong-Macau route. Air Macau’s routes also provide an alternative to our Hong Kong routes for passengers traveling between Taiwan and mainland China. As of December 31, 2020, we operated five flight routes from mainland China to Macau.

International

We compete with Air China, China Southern and many other well-established foreign carriers on our international routes. Most of our international competitors are very well-known international carriers and are substantially larger than we are and have substantially greater financial resources than we do. Many of our international competitors also have significantly longer operating histories and greater name recognition than we do. Some international passengers, who may perceive these airlines to be safer and provide better service than Chinese airlines in general, may prefer to travel on these airlines. In addition, many of our international competitors have more extensive sales networks and utilize more developed reservation systems than ours, or engage in promotional activities, such as frequent flyer programs, that may be more popular than ours and effectively enhance their ability to attract international passengers.

To improve our competitive position in international markets, we have established additional dedicated overseas sales offices, launched our own frequent flyer program, participated in “Asia Miles”, a popular frequent flyer program in Asia, and entered into code-sharing arrangements with a number of foreign airlines. We have also improved our online reservation and payment system. In addition, in June 2011, we joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes, among others, international carriers such as Delta Air Lines, China Southern, Alitalia, Air France and KLM. As a member of SkyTeam alliance, our Elite members can enjoy approximately 790 VIP lounges worldwide. Since 2013, we have been implementing code-sharing programs to extend our international route and improve our competitiveness and reputation in the international market. In 2020, we have actively responded to industry competition, proactively strived for additions of air traffic rights and time slot resources in hub markets and core markets, steadily improved utilization of aircraft and penetration in core markets, and consolidated and expanded our market share in the four major hubs and core markets. Leveraging on the SkyTeam Airline Alliance platform, we enhanced our strategic cooperation with Delta Air Lines, Inc. and Air France KLM, and strengthened our cooperation with non-member airlines of the SkyTeam Airline Alliance such as Qantas Airways Ltd and Japan Airlines Co., Ltd, so as to develop an efficient and convenient flight network covering all parts of China and connecting all parts of the world. As of December 31, 2020, we cooperated with 10 airline companies outside the SkyTeam Airline Alliance on code sharing.

Maintenance and Safety

The rapid increase in air traffic volume in China in recent years has put pressure on many components of China’s airline industry, including air traffic control systems, the availability of qualified flight personnel and airport facilities. In recent years, the CAAC has placed increasing emphasis on the safety of airline operations in China and has implemented a number of measures aimed at improving the safety record of the airlines. Our ability to provide safe air transportation in the future depends on the availability of qualified and experienced pilots in China and the improvement of maintenance services, national air traffic control and navigational systems and ground control operations at Chinese airports. We have a good safety record and regard the safety of our flights as the most important component of our operations.

Maintenance Capability

Through our cooperation with service providers and ventures with other companies, we currently perform regular repair and maintenance checks on all of our aircraft, which include D1 checks, C checks and other maintenance services for certain aircraft and other flight equipment. We also perform certain maintenance services for other Chinese and international airlines. We have four main maintenance bases in Shanghai, Kunming and Xi’an and several maintenance bases in our provincial hubs including Taiyuan, Qingdao, etc. We also constructed a new maintenance base in Beijing Daxing International Airport in 2019. Our primary aircraft maintenance base is at Pudong International Airport. We employed approximately 13,258 workers as maintenance personnel as of December 31, 2020. We prepared our own training plan for our employees to meet the requirements of certain regulations and the needs for future development. In order to enhance our maintenance capabilities and to reduce our maintenance costs, we have acquired additional maintenance equipment, tools and fixtures and other assets over the past few years, such as airborne testing and aircraft data recovery and analysis equipment. In 2019, we increased our capacities in our maintenance bases in Kunming and Xi’an by installing one additional production line for the maintenance of narrow-body aircraft in each of the two bases.Our avionics equipment is primarily maintained and repaired at our electronic maintenance equipment center located in Shanghai. In 2020, our maintenance bases continued to guarantee the maintenance and support work required for the daily operation of our large fleet.

 

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We entered into a joint venture with Honeywell International Inc. (“Honeywell”), formerly Allied Signal Inc., in Shanghai for performing maintenance and repairs on aircraft wheel assemblies and brakes. Since October 1997, we have operated a maintenance hangar at Hongqiao International Airport, which has the capacity to house two wide-body aircraft. We and Rockwell Collins International Inc. of the United States have also co-established Collins Aviation Maintenance Service Shanghai Limited, which is primarily engaged in the provision of repair and maintenance services for avionics and aircraft in-flight entertainment facilities in China. We and Rockwell Collins International Inc. hold 35% and 65%, respectively, of the equity interests in the joint venture. Moreover, in November 2002, we, jointly with Aircraft Engineering Investment Limited, established Shanghai Eastern Aircraft Maintenance Limited, in which we hold 60% of the equity interests, to provide supplemental avionics and other maintenance services to us. STA, which was established in 2004 by us and Singapore Technologies Aerospace Ltd. under a joint venture agreement dated March 10, 2003, also provides us with aircraft maintenance, repair and overhaul services. In 2019, we entered into one agreement with Honeywell, pursuant to which we expected we will save certain repairing costs. In 2020, we did not enter into any maintenance agreement with Honeywell.

In 2007, we entered into joint venture with United Technologies Corp. and took over equity interests in maintenance companies such as Boeing Shanghai Aviation Services Co., Ltd., Shanghai Hute Aviation Technology Co., Ltd. and Shanghai Airlines. In 2014, we established Eastern Airlines Technology Co. Ltd. (“Eastern Technology”), a wholly-owned subsidiary specializing in aircraft maintenance. Since 2016, our customer base continued to expand, other airlines such as Singapore Airlines, AirAsia, Royal Brunei Airlines, Macau Airlines, Delta Air Lines, Asiana Airlines, Hong Kong Airlines, Malaysia Airlines, Air Busan, British Airways and Egypt Air became customers of Eastern Technology. In 2020, we did not enter into any joint venture or cooperation agreement.

Safety

The provision of safe and reliable air services for all of our customers is one of our primary operational objectives. We implement uniform safety standards and safety-related training programs in all operations. Our flight safety management division monitors and supervises our flight safety. We have had a flight safety committee since the commencement of our business, comprised of members of our senior management, to formulate policies and implement routine safety checks at our Shanghai headquarters and all provincial hubs. The flight safety committee meets monthly to review our overall operation safety record during the most recent quarter and to adopt measures to improve flight safety based upon these reviews. We have also implemented an employee incentive program, using a system of monetary rewards and discipline, to encourage compliance with the CAAC safety standards and our safety procedures. We periodically evaluate the skills, experience and safety records of our pilots in order to maintain strict control over the quality of our pilot crews. In 2011, we were awarded the “Flight Safety Five-star Award” by CAAC for our commitment to aviation and operations safety.

Since 2013, we have been strengthening our Safety Management System (“SMS”) and further enhanced our safety management system by strengthening the enforcement of safety responsibilities, our safety supervision and inspection, our risk control over special routes and international routes for long-haul flights, enhancing our operational risk alert abilities, boosting the quality of training for our pilots, improving our system for developing talents with core skills, enhancing our ability in handling security-related contingencies, and strictly implementing safety requirements for our flights. In 2019, we adhered to the civil aviation safety with zero tolerance for safety hazards, and has maintained safe operation throughout the year. In addition, we have studied the risks of new aircraft and new routes in advance to continuously strengthen the foundation for safe development. In terms of mechanism establishment, we have improved the relevant rules and regulations as well as implementation rules of our safe production responsibility system to further enhance safety requirements.

In 2020, we continued to place great emphasis on ensuring safe operation and have ensured that all employees signed the safety responsibility agreement on “maintaining the original aspiration, assuming the mission, fulfilling commitments and making contributions” to further strengthen the implementation of safety responsibilities. In respect of strengthening risk supervision, we carried out in-depth safety rectification and special inspections of safety work, inspected and supervised key units and key tasks, carried out comprehensive investigation of hidden dangers, and improved safety management capabilities. In respect of the promotion of practice construction, based on the theme of the “three reverences”, we strengthened safety publicity and education, carried out practice and discipline rectification, and laid a solid foundation for safety management. In 2020, our fleet had 1,547,600 safe flying hours and 672,200 take-off and landing flights in total, which have respectively decreased by 35.4% and 32.0% compared to the same period in 2019 due to the decrease in travel demand resulting from the COVID-19 pandemic.

 

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Cyber-security

With respect to our internal policies on cyber-security and internet safety, we have established an information safety management system and issued internal regulations on cyber-security, internal hardware and data safety systems to prevent loss of information due to cyber-security incidents, network outages or hardware incidents. We also plan to implement measures relating to the office environment information safety management and information system emergency management, information system access control, protection from any malicious software, management of information exchange tools and internal review and audit of information safety risks. Furthermore, we have entered into a strategic cooperation plan with the China Information Technology Security Evaluation Center by which their trained engineers evaluate our internal data security policies and cyber-security measures. Since 2012, we established and announced four internal regulations relating to cyber-security, namely, China Eastern Airlines Information Security Management Regulation, China Eastern Airlines Information System Application and Development Safety Regulation, China Eastern Airlines Information Security Incident Management Regulation, China Eastern Airlines Information System Classification Measures, China Eastern Airlines Accounts Management Regulation and China Eastern Airlines Information System and Personal Data Protection Management Requirements, which we believe will strengthen our information safety management systems and overall cyber-security defenses. In addition, in strict compliance with the relevant provisions of the “General Data Protection Regulation” (“GDPR”) by the European Union, we have appointed a “data protection officer” to enhance the protection of customer information and prevent network security risks.

In 2020, we continuously promoted the construction of information security projects, and established a sound information security-related technical protection and security management platform. We strengthened information security management by deepening the strategic cooperation with external security agencies. In response to the implementation of the GDPR released by the European Union, we appointed a “data protection officer”. We strengthened customer privacy terms of online channels, assessed risks of third-party platforms and reinforced the passenger information protection firewall. In addition, we initiated a special task for network protection to improve its network security protection capabilities.

We did not purchase any insurance for internet security.

Fuel Supplies

Jet fuel is one of the major expenses of airlines. Fuel costs represented approximately 17.7% of our total operating expenses in 2020. We currently purchase a significant portion of the aviation fuel for our domestic routes from regional branches of the CAOSC. Fuel costs in China are affected by costs at domestic refineries and limitations in the transportation infrastructure, as well as by insufficient storage facilities for aviation fuel in certain regions of China. Fuel prices at six designated major airports in China, namely, the airports in Shanghai Pudong, Shanghai Hongqiao, Beijing, Guangzhou, Shenzhen and Tianjin, are set and adjusted once a month by the CAAC in accordance with prevailing fuel prices on the international market. For our international routes, we purchase a portion of our aviation fuel from foreign fuel suppliers located at the destinations of these routes, generally at international market prices. Significant fluctuations of international oil prices will significantly impact jet fuel prices and our revenue from fuel surcharge and accordingly our results of operations.

In 2020, our total aircraft fuel cost was approximately RMB13,840 million, representing a decrease of 59.5% from RMB34,191 million in 2019. The decrease was due to a decline in our fuel consumption by 38.5% and a drop in the average price of fuel by 34.2% from last year, both of which are attributable to the impact of the COVID-19 pandemeic. We cannot assure you that fuel prices will not fluctuate in the future. Further, due to the highly competitive nature of the airline industry and government regulation on airfare pricing, we may be unable to fully or effectively pass on to our customers any increased fuel costs we may encounter in the future. However, we intend to continue focusing on enhancing our jet fuel procurement policies and developing additional internal cost-control measures, which include streamlining the number of aircraft models in our fleet and optimizing route structures, which we believe will enable us to control our fuel costs.

Ground Facilities and Services

The center of our operations is Shanghai, one of China’s principal air transportation hubs. Our Shanghai operations are based at Hongqiao International Airport and Pudong International Airport. In addition, we also started our operation in Beijing Daxing International Airport following its commencement of operation in September 2019. We currently also operate from various other domestic airports. We have hangars, aircraft parking and other airport service facilities at these airports, and provide ground services in these locations.

We have our own ground services and other operational services, such as aircraft cleaning and refueling and the handling of passengers and cargo for our operations at Hongqiao International Airport and Pudong International Airport. We also provide ground services for many other airlines that operate to and from Hongqiao International Airport and Pudong International Airport.

In-flight meals and other catering services for our Shanghai-originated flights are provided primarily by Shanghai Eastern Air Catering Limited Liability Company, a joint venture company affiliated with CEA Holding. We generally contract with local catering companies for flights originating from other airports.

In 2020, we strengthened our service management, further improved service efficiency and service experience such as check-in, baggage check-in, priority boarding and VIP lounge.

 

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Marketing and Sales

Passenger Operations

Our marketing strategy with respect to passenger operations is primarily aimed at increasing our market share for all categories of air travelers. With respect to our Hong Kong and international routes, we are permitted to market our services based on price. We have limited flexibility in setting our airfares for domestic routes and adjust our domestic airfares in response to market demand. As part of our overall marketing strategy, we emphasize our commitment to safety and service quality. We believe that emphasis on safety is a critical component of our ability to compete successfully.

We have also adopted customized strategies to market our services to particular travelers. We seek to establish long-term customer relationships with business entities that have significant air travel requirements. In order to attract and retain business travelers, we focus on the frequency of flights between major business centers, convenient transit services and an extensive sales network. We launched our initial frequent flyer program in 1998 and joined the “Asia Miles” frequent flyer program in April 2001 to attract and retain travelers. In August 2003, we upgraded and rebranded our frequent flyer program to “Eastern Miles” and introduced a series of new services, including, among others, instant registration of membership and mileage, online registration of mileage, and accumulation of mileage on expenses at certain hotels, restaurants and other service providers that are our strategic partners. The special services hotline “95530” call center was established and came into operation in 2004. In light of the expansion of national high-speed railway network, we have cooperated with the Shanghai Railway Bureau to launch “Air-Rail Pass Transportation” products. Our domestic and international flights together with the high-speed railway products at Shanghai Hongqiao International Airport and Shanghai Pudong International Airport, have formed an air-rail two-way transportation product, which has helped us broaden our customer resources.

In terms of our customer resources, we have actively explored and expanded our customer base of high-end business travelers to accelerate the development of group clients. In addition, we have fully promoted the expansion of Eastern Miles membership. In order to attract more members and to provide members with better experience in terms of diversity, comprehensiveness and flexibility, we have strengthened our cooperation with retail stores by increasing the number of co-operative stores, covering various industries such as financial services, hotel, car rental and health services. We also strengthened the operation of points mall, enriched point redemption products, and optimized the points payment function. During the outbreak of the COVID-19 pandemic, we first launched “Wild Your Dreams”, a series of innovative products, to stimulate passengers’ travel demand, restore market confidence, promote the recovery of the aviation market, effectively serve the internal circulation of China and achieve good economic, social and brand benefits. We actively expanded the sales channels of auxiliary products such as VIP lounges and realized the voucher sales of products such as class upgrades, so as to increase auxiliary revenue; and launched the new “Eastern Miles” membership system and introduced the “Eastern Airlines Wallet” enabling “points + cash” payment, so as to increase the ways of using member points. Our members can use CEA points for purchasing products from us and other suppliers. The consumption scenarios and value for CEA points were increased. We also strictly implemented on-board protection measures, optimized on-board service procedures and meal services, and improved passenger satisfaction. Taking into account the significant reduction in air travel of members during the outbreak of the COVID-19 pandemic, we proactively issued a protection policy for automatic extension of membership level to enhance member loyalty and satisfaction.As of the end of 2020, frequent flyer members of “Eastern Miles” reached 45.22 million, increased by 5.95% as compared to 2019.

Our advertising, marketing and other promotional activities include the use of social media, online platforms, radio, television and print advertisements. We continue to diversify our advertising and promotional channels. We plan to continue to use advertising and promotional campaigns to increase sales on new routes and competitive routes.

In 2016, China Eastern Airlines E-Commerce Co., Ltd. (“Eastern E-Commerce”) established an e-commerce platform by integrating our online and offline platforms. Ticket returns, rebooking and upgrades via multiple channels, such as our official website, mobile application and member website were launched with success. In 2020, we continued to optimize the e-commerce platform to ensure user experience. At the same time, we upgraded the CEA APP and official website, supporting new functions such as “Wild Your Dreams” ticket packages, seat selection, multiple login methods, unified display of orders, site-wide search and epidemic prevention functions. We made efforts to provide passengers with more product choices while ensuring the efficiency of the system.

Ticket Booking Systems

In 2002 and again in 2012, we upgraded our online ticket booking and payment system to facilitate customer purchases of tickets via the Internet. In 2012, we also expedited the construction of nine overseas websites in a variety of languages. We continue to encourage our customers to book and purchase tickets via the Internet by initiating various promotional campaigns, upgrading and expanding the services offered by our online sales system. In 2012, we introduced “China Eastern Mobile E”, a smartphone application that provides mobile flight booking, flight status and online checking services, which we believe will provide our customers with additional convenient, value-added services. We have been continuing to update our mobile phone application and our official website to enhance our direct sales efforts as well as vigorously promoting the establishment of overseas e-commerce platform.

 

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In 2019, we established a joint team comprising of our client department, IT department and Eastern E-Commerce to upgrade our overall capabilities of e-commerce operation. We also launched a series of updates to our official website and mobile phone application in 2019. In 2020, our global websites have used global acceleration services. The access speed and the system availability have been imporoved significantly. In 2020, revenue from our direct sales channels (including our official website and mobile phone application) amounted to RMB93.8 billion, representing a decrease of approximately 29.5% as compared to 2019, primarily due to government restrictions on and decreased willingness to travel resulting from the outbreak of the COVID-19 pandemic. It is estimated that a new version of our official website and mobile phone application with multiple languages and currencies incorporated will be launched in 2020, where global travelers can purchase tickets and other products through one website and one mobile phone application.

We also maintain an extensive domestic network of sales agents and representatives in order to promote in-person ticket sales and to assist customers. Direct sales are also promoted through the availability of our telephone reservation and confirmation services. In addition to our domestic sales agents located in various cities in mainland China, Hong Kong, Macau and Taiwan, we maintain overseas sales or representative offices worldwide, including: (i) North American locations such as Honolulu, Los Angeles, New York, San Francisco and Vancouver; (ii) European and Middle Eastern locations such as Frankfurt, Hamburg, London, Moscow, Paris, Rome, Madrid, Brussels and Munich; (iii) Asia-Pacific locations such as Seoul, Tokyo, Osaka, Nagoya, Fukuoka, Hiroshima, Sapporo, Niigata, Fukushima, Okinawa, Shizuoka, Kanazawa, Toyama, Nagasaki, Kagoshima, Okayama, Matsuyama, Singapore, Bangkok, Phuket, New Delhi, Kolkata, Kuala Lumpur, Ho Chi Minh, Bali, Dubai, Dhaka, Phnom Penh, Siem Reap, Vientiane, Yangon, Mandalay, Kathmandu and Maldives; and (iv) Australian locations such as Melbourne and Sydney.

As of June 1, 2008, we stopped issuing paper tickets for air travel in accordance with a mandate from the International Air Transport Association (“IATA”). The IATA currently represents approximately 290 airlines and comprises approximately 82% of the world’s air traffic. As a result of the mandate, we now issue electronic itineraries and receipts as well as electronic tickets to our passengers. We believe the transition to 100% electronic ticketing will decrease administrative costs, increase flexibility and travel options for passengers, in addition to benefiting the environment through the reduced need for paper. All of our direct passenger ticket sales are recorded on our computer systems. Most Chinese airlines, including us, are required to use the passenger reservation service system provided by the CAAC’s computer information management center, which is linked with the computer systems of major Chinese commercial airlines. In 2020, we continued to use the TravelSky Passenger Service System (PSS), cooperated with several international reservation systems with which we have carried out relevant business cooperation for many years, including Amadeus, Sabre, Travelport, Infini and Axess. Among them, Axess is scheduled to terminate its operations with us on June 30, 2021 due to its sole reason and our cooperation with other companies developed normally. In 2020, we cooperated with China National Railway Group Co., Ltd. to open a new era of “air-rail combined transportation” by linking the system of the CEA APP and Railway 12306 APP and providing one-stop joint booking of “aircraft + high-speed rail”, thereby offering passengers with more convenient one-stop services.

SkyTeam Alliance

We officially joined SkyTeam, an international airlines alliance and frequent flyer mileage program that includes international carriers such as, among others, Delta Air Lines, Alitalia, Air France and KLM, on June 21, 2011 and have continued expand our code-sharing programs with SkyTeam members on more routes. In 2019, we further deepened and expanded our cooperation with SkyTeam member airlines. In 2020, leveraging on the SkyTeam Airline Alliance platform, we enhanced our strategic cooperation with Delta Air Lines, Inc. and Air France KLM to develop an efficient and convenient flight network covering all parts of China and connecting all parts of the world.

By connecting to the route networks of other SkyTeam member airlines, we were able to offer our passengers seamless transit to 44 destinations in 15 countries under a single plane ticket with direct luggage services as of December 31, 2020. Passengers may also enjoy the comfort of more than 750 VIP airport lounges of SkyTeam around the world. 1,036 domestic and foreign destinations in 170 countries were covered through extensive global cooperation of 19 member airlines. We believe this will be another benefit for our passengers, as they will be afforded additional flight options and frequent flyer mileage benefits through our SkyTeam alliance partners. In addition, we will benefit from possible codeshare and cooperative flight options, reduced costs and increased alliance-related marketing and promotion overseas.

 

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Patents and Trademarks

We own or have obtained licenses to use various domestic and foreign patents, patent applications and trademarks related to our business. While patents, patent applications and trademarks are important to our competitive position, no single one is material to us as a whole. In addition, we own various trademarks related to our business. The most important trademark is the service trademark of China Eastern Airlines Corporation Limited. All of our trademarks are registered in China.

Insurance

The CAAC purchases fleet insurance from PICC Property and Casualty Company Limited (“PICC”), and China Pacific Property Insurance Company Ltd., on behalf of all Chinese airlines. PICC has reinsured a substantial portion of its aircraft insurance business through Lloyd’s of London. The fleet insurance is subject to certain deductibles. The premium payable in connection with the insurance is allocated among all Chinese airlines based on the aircraft owned or leased by these airlines. Under the relevant PRC laws, the maximum civil liability of Chinese airlines for injuries to passengers traveling on domestic flights has been increased to RMB400,000 per passenger in March 2006, for which we also purchase insurance. As of July 31, 2006, the Convention for the Unification of Certain Rules for International Carriage by Air of 1999, or Montreal Convention, became effective in China. Under the Montreal Convention, carriers of international flights are strictly liable for proven damages up to 128,821 Special Drawing Rights and beyond that, carriers are only able to exclude liability if they can prove that the damage was not due to negligence or other wrongful act of the carrier (and its agents) or if the damage solely arose from the negligence or other wrongful act of a third party. We believe that we maintain adequate insurance coverage for the civil liability that can be imposed due to injuries to passengers under Chinese law, the Montreal Convention and any other agreement we are subject to. We also maintain hull all risk, hull war risk and aircraft legal liability insurance, including third party liability insurance, of the types and in amounts customary for Chinese airlines.

C. Organizational Structure

See the section headed “Item 4. Information on the Company - History and Development of the Company”.

D. Property, Plant and Equipment

Fleet

As of December 31, 2020, we operated a fleet of 734 aircraft, including 725 passenger aircraft, most with a seating capacity of over 100 seats and 9 business aircraft held under trust. In 2020, we introduced 13 aircraft of major models. With the introduction of new aircraft, such as A350-900, B787-9 and A320NEO, our fleet age structure has remained young.

We plan to continue to expand our scale in the future and to adjust and optimize our route network, thereby increasing our competitiveness and ability to create more attractive products and services to meet the needs of the market.

Existing Fleet

The following table sets forth the details of our fleet as of December 31, 2020:

 

                                      Units  
    

No. Model

  

Self-

owned

    

Under

finance

lease

    

Under

operating

lease

    

Sub-

total

    

Average

fleet age

(Years)

 
1    B777-300ER      10        10        0        20        4.9  
2    B787-9      3        7        0        10        1.9  
3    A350-900      1        7        0        8        1.5  
4    A330 series      30        21        5        56        7.1  

Total number of wide-body aircraft

     44        45        5        94        5.6  
5    A320 series      137        127        72        336        8.0  
6    B737 series      102        73        117        292        6.6  

Total number of narrow-body aircraft

     239        200        189        628        7.4  
7    ARJ21      2        1        0        3        0.2  

Total number of regional aircraft

     2        1        0        3        0.2  

Total number of passenger aircraft

     285        246        194        725        7.1  

Total number of business aircraft held under trust

              9     

Total number of aircraft

              734     

 

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The table below sets forth the daily average utilization rates of our jet passenger aircraft for the year ended December 31, 2020:

 

     2020  
     (in hours)  

B777-300ER

     7.36  

B787-9

     6.46  

A350-900

     6.51  

A330 Series

     5.64  

A320 Series

     6.15  

B737 Series

     5.80  

ARJ21

     2.72  

Most of our jet passenger aircraft were manufactured by either Airbus or Boeing Company. On July 9, 2015, we entered into a purchase agreement with Boeing Company to purchase fifty new Boeing B737 series aircraft which are expected to be delivered to us in stages from 2017 to 2019. On August 14, 2015, we also entered into a purchase agreement with Airbus SAS to purchase fifteen new Airbus A330 series aircraft, which are expected to be delivered to us in stages from 2017 to 2018. On April 28, 2016, we entered into a purchase agreement with Boeing Company to purchase 15 B787-9 aircraft, which are expected to be delivered to us in stages from 2018 to 2021. On the same day, we also entered into a purchase agreement with Airbus SAS to purchase 20 Airbus A350-900 series aircraft, which are expected to be delivered to us in stages from 2018 to 2022. On August 30, 2019, we entered into an aircraft purchase agreement with Commercial Aircraft Corporation of China Limited to purchase 35 ARJ21-700 aircraft, which are single-aisle regional aircraft with medium and short range and are expected to be delivered to us in stages from 2020 to 2024.

Future Fleet Development

Our aircraft acquisition program focuses on aircraft that will modernize and rationalize our fleet to better meet the anticipated requirements of our route structure, taking into account aircraft size and fuel efficiency. Our aircraft acquisition program, however, is subject to the approval of the CAAC and the NDRC. Older aircraft models of high energy-consumption will be surrendered as appropriate. Details of the expected fleet plan from 2021 to 2023 are as follows:

 

     2021E      2022E      2023E  
     Introduction      Retirement      Introduction      Retirement      Introduction      Retirement  

Model

                 

A320 Series

     27        6        34        5               4  

A330 Series

                                         

A350 Series

     4               8                       

B737 Series

            3               4        46        12  

B787 Series

     5                                     

ARJ Series

     6               8               9         

Total

     43        9        52        9        57        16  

Notes:

 

(1)

We and our suppliers have engaged in proactive negotiation and adjusted the progress for the introduction of aircraft under the influence of the COVID-19 pandemic. The planning for the introduction and retirement of aircraft will be subject to timely adjustment based on the changes in external environment, market conditions and our flight capacity allocation. The timing for resumption of operation of B737 MAX 8 and future deliveries remains uncertain.

As of December 31, 2020, according to confirmed orders, we planned to introduce nine aircraft and retire 21 aircraft in 2024.

The actual quantity and time of the introduction and retirement of any of these aircraft or any additional aircraft may depend on such factors as general economic conditions, the levels of prevailing interest rates, foreign exchange rates, the level of inflation, credit conditions in the domestic and international markets, conditions in the global aviation industry, our financial condition and results of operations, our financing requirements, and the terms of any financing arrangements, such as leases, and other capital requirements. We believe that our aircraft acquisition plan will help us accomplish our expansion plans while maintaining an efficient fleet and ensuring alternative sources of supply.

 

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Fleet Financing Arrangements

We generally acquire aircraft through internal funds, long-term capital leases or operating leases. Under the terms of most capital leases, we generally are obligated to make lease payments that finance most of the purchase price of the aircraft over the lease term. Upon the expiration of the lease term, we must either purchase the aircraft at a specified price or pay any amount by which such price exceeds the proceeds from the disposition of the aircraft to third parties. Alternatively, some capital leases provide for ownership of the aircraft to pass to us upon satisfaction of the final lease payment. Under capital leases, aircraft are generally leased for approximately the whole of their estimated working life, and the leases are either non-cancelable or cancelable only on a payment of a major penalty by the lessee. As a result, we bear substantially all of the economic risks and rewards of ownership of the aircraft held under capital leases. Operating leases, however, are customarily cancelable by the lessee on short notice and without major penalty. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Due to the adoption of IFRS 16 Leases, long-term capital lease and operating leases are both classified as leases in our financial statements. For details of the impact of IFRS 16 Leases on us, please refer to the section headed “Critical Accounting Policies” under Item 5.

Operating Facilities

As of December 31, 2020, we (including subsidiaries and branches) had operations on 660 parcels of land, occupying a total area of approximately 4.1 million square meters. In addition, as of December 31, 2020, we (including subsidiaries and branches) owned approximately 2,161 buildings. We and our major subsidiaries have obtained the land use rights certificates and building ownership certificates for most parcels of land and buildings, and are currently in the process of applying for the certificates with respect to the remaining 16 parcels of land and 167 buildings. We did not have any environmental issues that may have a material impact on our utilization of the assets in 2020.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

You should read the following discussion in conjunction with our audited consolidated financial statements, together with the related notes, included elsewhere in this Annual Report. Our consolidated financial statements have been prepared in accordance with IFRSs. This discussion may include forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key information - D. Risk Factors” or in other parts of this Annual Report.

Overview

Our primary business is the provision of domestic, regional (which includes Hong Kong, Macau and Taiwan) and international passenger services.

Our overall capacity on an available tonne kilometer, or ATK, basis decreased by approximately 38.3% from approximately 33,456 million in 2019 to approximately 20,632 million in 2020, and our passenger capacity on an available seat kilometer, or ASK, basis decreased by 43.7% from approximately 270,254 million in 2019 to approximately 152,066 million in 2020. Total traffic on a revenue tonne kilometer, or RTK, basis decreased by 48.0%, from approximately 22,518 million in 2019 to approximately 11,700 million in 2020.

The historical results of operations discussed in this Annual Report may not be indicative of our future operating performance. Like those of other airlines, our operations depend substantially on overall passenger and cargo traffic volumes and are subject to seasonal and other variations that may influence passenger travel demand and cargo volume and may not be under our control, including unusual political events, changes in the domestic and global economies and other unforeseen events. Our operations will be affected by, among other things, fluctuations in aviation fuel prices, aircraft acquisition and leasing costs, maintenance expenses, take-off and landing charges, wages, salaries and benefits, other operating expenses, the rates of income taxes paid and public health events such as the COVID-19 pandemic.

Our financial performance is also significantly affected by factors associated with operating in a highly regulated industry, as well as a number of other external variables, including political and economic conditions in China, competition, foreign exchange fluctuations and public perceptions of the safety of air travel with Chinese airlines. Because nearly every aspect of our airline operations is subject to the regulation of the CAAC, our operating revenues and expenses are directly affected by the CAAC regulations with respect to, among other things, domestic airfares, level of commissions paid to sales agents, the aviation fuel price, take-off and landing charges and route allocations. The nature and extent of airline competition and the ability of Chinese airlines to expand are also significantly affected by various CAAC regulations and policies. Changes in the CAAC’s regulatory policies, or in the implementation of such policies, are therefore likely to have a significant impact on our future operations.

 

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Critical Accounting Policies

We prepare our consolidated financial statements in accordance with IFRSs which requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies. We have established procedures and processes to facilitate the making of such judgments in the preparation of our consolidated financial statements. Management has used the best information available but actual performance may differ from our management’s estimates and future changes in key variables could change future reported amounts in our consolidated financial statements.

Revenue recognition

Revenue from contracts with customers

Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which we will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved.

When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the customer and us at contract inception. When the contract contains a financing component which provides us with a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15.

 

  (i)

Passenger, cargo and mail revenues are recognized as traffic revenue when the transportation is provided or when ticket breakage occurs. The value of sold but unused tickets is included in contract liabilities as sales in advance of carriage (“SIAC”). We estimate the value of passenger ticket breakage based on historical trends and experience and recognizes revenue at the scheduled flight date.

 

  (ii)

Revenues from the provision of ground services, tour services, ticket cancelation services and other travel related services are recognized when the services are rendered.

 

  (iii)

Commission income represents amounts earned from other carriers in respect of sales made by us on their behalf, and is recognized upon ticket sales.

 

  (iv)

We operate a frequent flyer program called “Eastern Miles” that issues mileage points to program members based on accumulated mileage. We defer a portion of passenger revenue attributable to the mileage points issued based on the relative stand-alone selling price approach and recognizes revenue when the mileage points are redeemed and performance obligations are fulfilled or the mileage points expire unused. The stand-alone selling price of the mileage points was estimated based on the historical prices of equivalent flights and goods provided for mileage points redeemed and was adjusted for mileage points that are not expected to be redeemed (“Breakage”).

 

  (v)

Revenue from the sale of goods is recognized at the point in time when control of the asset is transferred to the customer.

Revenue from other sources

Rental income is recognized on a time proportion basis over the lease terms. Variable lease payments that do not depend on an index or a rate are recognized as income in the accounting period in which they are incurred.

Other income

Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.

Dividend income is recognized when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to us and the amount of the dividend can be measured reliably.

 

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Contract liabilities

A contract liability is recognized when a payment is received or a payment is due (whichever is earlier) from a customer before we transfer the related goods or services. Contract liabilities are recognized as revenue when we perform under the contract (i.e., transfers control of the related goods or services to the customer).

Maintenance and overhaul costs

Overhaul costs that meet specific recognition criteria are capitalized as a component of property, plant and equipment or right-of-use assets and are depreciated over the appropriate maintenance cycles.

Certain lease arrangements contain provisions that we are obligated to fulfill certain return conditions at the end of lease term. We estimate lease return costs for aircraft and engines and recognized such costs as part of the right-of-use asset and are depreciated during the lease term. (applicable from January 1, 2019)

Provision for the estimated lease return costs for aircraft and engines is made on a straight-line basis over the lease term. (applicable before January 1, 2019)

All other repairs and maintenance costs are charged to profit or loss as and when incurred.

Goodwill

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognized for non-controlling interests and any fair value of our previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized in profit or loss as a gain on bargain purchase.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Weperform our annual impairment test of goodwill as of December 31. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of our cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of ours are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period.

Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the relative value of the operation disposed of and the portion of the cash-generating unit retained.

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5, as further explained in the accounting policy for “Non-current assets and disposal groups held for sale”. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

When each major aircraft overhaul is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment and is depreciated over the appropriate maintenance cycles. Components related to airframe overhaul cost, are depreciated on a straight-line basis over 5 to 7.5 years. Components related to engine overhaul costs, are depreciated between each overhaul period using the ratio of actual flying hours and estimated flying hours between overhauls. Upon completion of an overhaul, any remaining carrying amount of the cost of the previous overhaul is derecognized and charged to profit or loss.

Except for components related to overhaul costs, the depreciation method of which has been described in the preceding paragraph, other depreciation of property, plant and equipment is calculated using the straight-line method to write off their costs to their residual values over their estimated useful lives, as follows:

 

Owned aircraft and engines

   20 years

Other flight equipment, including rotables

   10 years

Buildings

   8 to 35 years

Other property, plant and equipment

   3 to 20 years

 

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Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in the statement of profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

Impairment of non-financial assets (other than goodwill)

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, financial assets, and non-current assets/a disposal group classified as held for sale), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. We owned and leased aircraft and engines are included in the airline transportation operations cash-generating unit. Management uses the value in use of the cash-generating unit of airline transportation operations to determine the recoverable amount.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset.

An assessment is made at the end of each reporting period as to whether there is an indication that previously recognized impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization) had no impairment loss been recognized for the asset in prior years. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and our business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which we have applied the practical expedient of not adjusting the effect of a significant financing component, initially we measure a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which we have applied the practical expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies set out for “Revenue recognition”.

In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model.

 

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Our business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows, while financial assets classified and measured at fair value through other comprehensive income are held within a business model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not held within the aforementioned business models are classified and measured at fair value through profit or loss.

All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that we commit to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at amortized cost (debt instruments)

Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in the statement of profit or loss when the asset is derecognized, modified or impaired.

Financial assets at fair value through other comprehensive income (debt instruments)

For debt investments at fair value through other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the statement of profit or loss and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in other comprehensive income. Upon derecognition, the cumulative fair value change recognized in other comprehensive income is recycled to the statement of profit or loss.

Financial assets designated at fair value through other comprehensive income (equity investments)

Upon initial recognition, we can elect to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive income when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.

Gains and losses on these financial assets are never recycled to the statement of profit or loss. Dividends are recognized as other income in the statement of profit or loss when the right of payment has been established, it is probable that the economic benefits associated with the dividend will flow to us and the amount of the dividend can be measured reliably, except when we benefit from such proceeds as a recovery of part of the cost of the financial asset, in which case such gains are recorded in other comprehensive income. Equity investments designated at fair value through other comprehensive income are not subject to impairment assessment.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of profit or loss.

This category includes derivative instruments and equity investments which we had not irrevocably elected to classify at fair value through other comprehensive income. Dividends on equity investments classified as financial assets at fair value through profit or loss are also recognized as other income in the statement of profit or loss when the right of payment has been established, it is probable that the economic benefits associated with the dividend will flow to us and the amount of the dividend can be measured reliably.

A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in the statement of profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.

A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.

 

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Impairment of financial assets

We recognize an allowance for expected credit losses (“ECLs”) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that we expect to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

General approach

ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

At each reporting date, we assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, we compare the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information.

We consider a financial asset in default when contractual payments are past due. However, in certain cases, we may also consider a financial asset to be in default when internal or external information indicates that we are unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by us. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Debt investments at fair value through other comprehensive income and financial assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables and contract assets which apply the simplified approach as detailed below.

 

Stage 1 –    Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs
Stage 2 –    Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 –    Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at an amount equal to lifetime ECLs

Simplified approach

For trade receivables and contract assets that do not contain a significant financing component or when we apply the practical expedient of not adjusting the effect of a significant financing component, we apply the simplified approach in calculating ECLs. Under the simplified approach, we do not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. We have established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

Derivative financial instruments and hedge accounting

Initial recognition and subsequent measurement

We use derivative financial instruments, such as forward currency contracts, interest rate swaps and fuel forward contracts, to hedge its foreign currency risk, interest rate risk and fuel price risk, respectively. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

The fair value of commodity purchase contracts that meet the definition of a derivative as defined by IFRS 9 is recognized in the statement of profit or loss as cost of sales. Commodity contracts that are entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with our expected purchase, sale or usage requirements are held at cost.

Any gains or losses arising from changes in fair value of derivatives are taken directly to the statement of profit or loss, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income and later reclassified to profit or loss when the hedged item affects profit or loss.

 

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For the purpose of hedge accounting, hedges are classified as:

 

   

fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; or

 

   

cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, or a foreign currency risk in an unrecognized firm commitment; or

 

   

hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, we formally designate and documents the hedge relationship to which we wish to apply hedge accounting, the risk management objective and its strategy for undertaking the hedge.

The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how we will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:

 

   

There is “an economic relationship” between the hedged item and the hedging instrument.

 

   

The effect of credit risk does not “dominate the value changes” that result from that economic relationship.

 

   

The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that we actually hedge and the quantity of the hedging instrument that we actually use to hedge that quantity of hedged item.

Hedges which meet all the qualifying criteria for hedge accounting are accounted for as follows:

Cash flow hedges

The effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognized immediately in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item.

The amounts accumulated in other comprehensive income are accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. This is not a reclassification adjustment and will not be recognized in other comprehensive income for the period. This also applies where the hedged forecast transaction of a non-financial asset or non-financial liability subsequently becomes a firm commitment to which fair value hedge accounting is applied.

For any other cash flow hedges, the amount accumulated in other comprehensive income is reclassified to the statement of profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect the statement of profit or loss.

If cash flow hedge accounting is discontinued, the amount that has been accumulated in other comprehensive income must remain in accumulated other comprehensive income if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to the statement of profit or loss as a reclassification adjustment. After the discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated other comprehensive income is accounted for depending on the nature of the underlying transaction as described above.

Fair value hedges

The change in the fair value of a hedging instrument is recognized in the statement of profit or loss as other expenses. The change in the fair value of the hedged item attributable to the risk hedged is recorded as a part of the carrying amount of the hedged item and is also recognized in the statement of profit or loss as other expenses.

 

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For fair value hedges relating to items carried at amortized cost, the adjustment to carrying value is amortized through the statement of profit or loss over the remaining term of the hedge using the effective interest rate method. Effective interest rate amortization may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognized, the unamortized fair value is recognized immediately in the statement of profit or loss.

When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in the statement of profit or loss. The changes in the fair value of the hedging instrument are also recognized in the statement of profit or loss.

Current versus non-current classification

Derivative instruments that are not designated as effective hedging instruments are classified as current or non-current or separated into current and non-current portions based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows).

 

   

Where we expect to hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond 12 months after the end of the reporting period, the derivative is classified as non-current (or separated into current and non-current portions) consistently with the classification of the underlying item.

 

   

Embedded derivatives that are not closely related to the host contract are classified consistently with the cash flows of the host contract.

 

   

Derivative instruments that are designated as, and are effective hedging instruments, are classified consistently with the classification of the underlying hedged item. The derivative instruments are separated into current portions and non-current portions only if a reliable allocation can be made.

Leases (policies under IFRS 16 applicable from January 1, 2019)

We assess at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

  (i)

As lessee

We apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. We recognize lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

  (a)

Right-of-use assets

Right-of-use assets are recognized at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. The cost of a right-of-use asset also includes an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:

 

Aircraft and engines under leases    5 to 20 years
Buildings    2 to 10 years
Prepayments for land use rights    40 to 50 years
Others    2 to 5 years

If ownership of the leased asset transfers to us by the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.

 

  (i)

Lease liabilities

Lease liabilities are recognized at the commencement date of the lease at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by us and payments of penalties for termination of a lease, if the lease term reflects us exercising the option to terminate the lease. The variable lease payments that do not depend on an index or a rate are recognized as an expense in the period in which the event or condition that triggers the payment occurs.

 

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In calculating the present value of lease payments, we use its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in lease payments (e.g., a change to future lease payments resulting from a change in an index or rate) or a change in assessment of an option to purchase the underlying asset.

 

  (ii)

Short-term leases and leases of low-value assets

We apply the short-term lease recognition exemption to its short-term leases (that is those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). We also apply the recognition exemption for leases of low-value assets to leases of assets that are considered to be of low value. Lease payments on short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis over the lease term.

 

  (ii)

As lessor

When we act as a lessor, it classifies at lease inception (or when there is a lease modification) each of its leases as either an operating lease or a finance lease.

Leases in which we do not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. When a contract contains lease and non-lease components, we allocate the consideration in the contract to each component on a relative stand-alone selling price basis. Rental income is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Leases that transfer substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee are accounted for as finance leases.

Leases (applicable before January 1, 2019)

 

  (i)

As lessee

Finance leases

Leases where we have acquired substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the assets and the present value of the minimum lease payments.

Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in the current portion of obligations under finance leases and obligations under finance leases, respectively. The interest element of the finance costs is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Leased assets are depreciated using a straight-line basis over their expected useful lives to residual values.

For sale and leaseback transactions resulting in a finance lease, we continue to recognize the transferred asset and recognize a financial liability equal to the transfer proceeds.

Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.

For sale and leaseback transactions resulting in an operating lease, differences between sales proceeds and net book values are recognized immediately in profit or loss, except to the extent that any profit or loss is compensated for by future lease payments at above or below the market value, then the profit or loss is deferred and amortized over the period for which the asset is expected to be used.

 

  (ii)

As lessor

Assets leased out under operating leases are included in property, plant and equipment in the statement of financial position. They are depreciated over their expected useful lives on a basis consistent with similar property, plant and equipment. Rental income is recognized on a straight-line basis over the lease term.

 

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Retirement benefits

 

  (i)

Defined contribution plans

We participate in schemes regarding pension and medical benefits for employees organized by the municipal governments of the relevant provinces. Contributions to these schemes are expensed as incurred.

We also implement an additional defined contribution pension benefit scheme (annuity) for voluntary eligible employees. Contributions are made based on a percentage of the employees’ total salaries and are charged to profit or loss as incurred.

 

  (ii)

Defined benefit plan

We provide eligible retirees with certain post-retirement benefits including retirement subsidies, transportation allowance as well as other welfare. The defined post-retirement benefits are unfunded. The cost of providing benefits under the post-retirement benefit plan is determined using the projected unit credit actuarial valuation method.

Remeasurements arising from the post-retirement benefit plan, comprising actuarial gains and losses, the effect of the asset ceiling (excluding net interest) and the return on plan assets (excluding net interest), are recognized immediately in the consolidated statement of financial position with a corresponding debit or credit to equity through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognized in profit or loss at the earlier of:

 

  (i)

the date of the plan amendment or curtailment; and

 

  (ii)

the date that we recognize restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. We recognize the following changes in the net defined benefit obligation under “Wages, salaries and benefits” and “Finance costs” in profit or loss:

 

  (i)

service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements; and

 

  (ii)

net interest expense

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which we operate.

Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except:

 

   

when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

 

   

in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, and the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilized, except:

 

   

when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

 

   

in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

 

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The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and deferred tax liabilities are offset if and only if we have a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Critical Accounting Estimates and Judgments

Estimates and judgments used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. We make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Passenger ticket breakage

We recognize traffic revenues in accordance with the accounting policy stated in Note 2.4 to the consolidated financial statements. Passenger ticket breakage is recognized as revenue based on estimates. We estimate the value of passenger ticket breakage, reduces contract liabilities and recognizes revenue at the scheduled flight date using a portfolio based approach. The breakage rate is estimated and constrained by reference to the historical trend of passenger ticket breakage.

Recognition of contract liabilities for frequent flyer program

Passenger ticket sales earning mileage points under the Company’s frequent flyer program provide customers with mileage points earned and air transportation. A portion of passenger revenue attributable to the mileage points issued is deferred based on the relative stand-alone selling price approach. Significant assumptions are used in determining the estimated stand-alone selling price of mileage points, including the historical prices of equivalent flights and goods provided, which is estimated by reference to the quantitative value a program member receives by redeeming mileage points for flights and goods, and the estimated Breakage. The Breakage is estimated considering historical redemption pattern, current industry and economic trends and other relevant factors. Changes in the significant assumptions could have a significant effect on the balance of contract liabilities for frequent flyer program and the results of operations.

Provision for lease return costs for aircraft and engines

Provision for lease return costs for aircraft and engines is recognized as part of the right-of-use assets and are depreciated during the lease term. The estimation of the provision is made taking into account anticipated aircraft and engines’ utilization patterns and the anticipated return costs derived from historical experience of actual return costs incurred. Different estimates could significantly affect the estimated provision for lease return costs for aircraft and engines.

Retirement benefits

We operate and maintain a defined retirement benefit plan which provides eligible retirees with benefits including retirement subsidies, transportation allowance as well as other welfare. The cost of providing the aforementioned benefits in the defined retirement benefit plan is actuarially determined and recognized over the employee’s service period by utilizing various actuarial assumptions and using the projected unit credit method in accordance with the accounting policy stated in Note 2.4 to the consolidated financial statements. These assumptions include, without limitation, the selection of discount rate and annual rate of increase of per capita benefit payment. The discount rate is based on management’s review of government bonds. The annual rate of increase of benefit payments is based on the general local economic conditions.

Additional information regarding the retirement benefit plan is disclosed in Note 38 to the consolidated financial statements.

 

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Deferred income tax

Deferred tax assets are recognized for unused tax losses and deductible temporary difference to the extent that it is probable that taxable profit will be available against which the losses and deductible temporary difference can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

Provision for flight equipment spare parts

Provision for flight equipment spare parts is made based on the difference between the carrying amount and the net realizable value. The net realizable value is estimated based on current market condition, historical experience and the Company’s future operation plan for the aircraft and related spare parts. The net realizable value may be adjusted significantly due to the change of market condition and the future plan for the aircraft and related spare parts.

Estimated impairment of long-term assets (other than goodwill)

We test whether property, plant and equipment, right-of-use assets, intangible assets (other than goodwill), advanced payments on acquisition of aircraft and other non-current assets have been impaired in accordance with the accounting policy stated in Note 2.4 to the consolidated financial statements. The recoverable amount of the cash-generating unit has been determined based on the higher of its value in use and its fair value less costs of disposal. The cash flow projections used to determine the value in use of a cash-generating unit, including the airline transportation operations cash-generating unit, is based on significant assumptions, such as revenue growth rates and the discount rate applied to the projected cash flows. These assumptions may be affected by unexpected changes in future market or economic conditions.

Impairment of goodwill

We determine whether goodwill is impaired at least on an annual basis. This requires an estimation of the recoverable amount which is the higher of its value in use and its fair value less costs of disposal. We use the value in use of the cash-generating unit to which the goodwill is allocated to determine the recoverable amount. The cash flow projections used to determine the value in use of a cash-generating unit, including the airline transportation operations cash-generating unit, is based on significant assumptions, such as revenue growth rate, terminal growth rate and the discount rate applied to the projected cash flows. These assumptions may be affected by unexpected changes in future market or economic conditions.

Fair value of unlisted equity investments

The unlisted equity investments have been valued based on a market-based valuation technique as detailed in Note 47 to the consolidated financial statements. The valuation requires us to determine the comparable companies (peers) and select the price multiple. In addition, we make estimates about the discount for illiquidity and size differences. We classify the fair value hierarchy of these investments as Level 3.

Leases – Estimating the incremental borrowing rate (applicable from January 1, 2019)

We cannot readily determine the interest rate implicit in a lease, and therefore, it uses an incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that we would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what we “would have to pay”, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when it needs to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). We estimate the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating) when necessary.

A. Operating Result

The following tables set forth our summary consolidated statements of profit or loss and other comprehensive income and financial position data as of and for the years indicated:

 

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           Year Ended December 31,        
     2016     2017     2018     2019     2020  
     RMB     RMB     RMB     RMB     RMB  
     (in millions, except per share or per ADS data)  

Consolidated Statements of Profit or Loss and Other Comprehensive Income Data:

          

Revenues

     98,904       102,475       115,278       120,986       58,727  

Other operating income and gains

     5,469       7,481       6,592       7,202       5,698  

Operating expenses (1)

     (91,887     (100,525     (112,561     (118,107     (78,265

Operating profit /(loss)

     12,486       9,431       9,309       10,081       (13,840

Finance costs, net

     (6,176     (1,072     (5,657     (6,064     (2,553

Profit /(loss) before income tax

     6,497       8,610       3,856       4,299       (16,488

Profit /(loss) for the year attributable to the equity holders of the Company

     4,498       6,342       2,698       3,192       (11,836

Basic and fully diluted earnings /(loss) per share (2)

     0.33       0.44       0.19       0.21       (0.72

 

           As of December 31,        
     2016     2017     2018     2019     2020  
     RMB     RMB     RMB     RMB     RMB  
                 (in millions)              

Consolidated Statements of Financial Position Data:

          

Cash and cash equivalents

     1,695       4,605       646       1,350       7,651  

Net current liabilities

     (52,194     (62,035     (57,132     (58,620     (77,310

Non-current assets

     196,436       211,434       223,085       265,442       262,152  

Long term borrowings, including current portion

     (29,749     (28,842     (32,506     (31,137     (39,429

Lease liabilities, including current portion

     —         —         —         (110,275     96,251  

Obligations under finance leases, including current portion

     (61,041     (66,868     (77,427     —         —    

Total share capital and reserves attributable to the equity holders of the Company

     49,450       55,360       58,008       69,008       56,249  

Non-current liabilities

     (91,876     (90,621     (104,352     (134,176     (125,688

Total assets less current liabilities

     144,242       149,399       165,953       206,822       184,842  

Notes:

 

(1)

Including gain on fair value changes of derivative financial instruments of RMB2 million, RMB311 million, nil and nil for the years ended December 31, 2016, 2018, 2019 and 2020 respectively, and loss on fair value changes of derivative financial instruments of RMB311 million for the year ended December 31, 2017.

(2)

The calculation of earnings per share for 2016 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 13,811,136,000 ordinary shares in issue. The calculation of earnings per share for 2017 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 14,467,585,682 ordinary shares in issue. The calculation of earnings per share for 2018 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 14,467,585,682 ordinary shares in issue. The calculation of earnings per share for 2019 is based on the net profit attributable to the equity holders of the Company divided by the weighted average number of 15,104,893,522 ordinary shares in issue. The calculation of loss per share for 2020 is based on the net loss attributable to the equity holders of the Company divided by the weighted average number of 16,379,509,203 ordinary shares in issue.

2020 Compared to 2019

Our revenues decreased by approximately 51.5% from approximately RMB120,986 million in 2019 to approximately RMB58,727 million in 2020.

In 2020, we transported approximately 75 million passengers, representing a decrease of approximately 42.7%, from approximately 130 million passengers in 2019. Our total passenger traffic (as measured in RPKs) decreased by approximately 51.6%, from approximately 221,779 million in 2019 to approximately 107,273 million in 2020.

Our total cargo and mail traffic (as measured in RFTKs) decreased by approximately 26.0% from approximately 2,971 million in 2019 to 2,200 million in 2020.

Our average yield for our passenger operations decreased by approximately 5.6% from approximately RMB0.52 per passenger-kilometers in 2019 to approximately RMB0.49 per passenger-kilometers in 2020.

 

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Our average yield for our cargo and mail operations increased by approximately 72.8% from approximately RMB1.29 per freight tonne-kilometers in 2019 to approximately RMB2.23 per freight tonne-kilometers in 2020.

The following chart sets forth our revenue breakdown for 2019 and 2020:

 

     Year Ended
December 31
     2020 vs. 2019  
     2019      2020      Increase
(Decrease)
     % Increase
(Decrease)
 
            (in RMB millions)         

Traffic revenues

     114,242        54,110        (60,132      (52.6

Passenger revenue

     110,416        49,215        (61,201      (55.4

Cargo and mail revenue

     3,826        4,895        1,069        27.9  

Others (1)

     6,744        4,617        (2,127      (31.5

Total Operating Revenue

     120,986        58,727        (62,259      (51.5

Notes:

 

(1)

Including tour operations income, ground service income, commission income and others.

Passenger revenues

Our passenger traffic revenues decreased by approximately RMB61,201 million, or approximately 55.4%, from approximately RMB110,416 million in 2019 to approximately RMB49,215 million in 2020. This decrease was primarily due to decreased passenger demand and decrease in scheduled flights resulting from the COVID-19 pandemic.

Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues) amounted to approximately RMB40,343 million in 2020, which accounted for approximately 82.0% of our total passenger traffic revenues in 2020, decreased by approximately 44.6% from approximately RMB72,764 million in 2019, primarily due to decreased passenger demand resulting from the COVID-19 pandemic. Our domestic passenger traffic (as measured in RPKs) decreased by approximately 32.7% from approximately 142,921 million in 2019 to approximately 96,206 million in 2020. The number of passengers carried on domestic routes decreased by approximately 33.9% from approximately 109 million in 2019 to approximately 72 million in 2020. Our passenger-kilometers yield for domestic routes decreased from approximately RMB0.54 per passenger-kilometer in 2019 to approximately RMB0.46 per passenger-kilometer in 2020.

Our regional passenger traffic revenues (representing Hong Kong, Macau and Taiwan passenger revenues) amounted to approximately RMB405 million in 2020, which accounted for approximately 0.8% of our total passenger traffic revenues in 2020, decreased by approximately 89.0% from approximately RMB3,686 million in 2019, primarily due to the decrease of passenger volume resulting from the COVID-19 pandemic. Our regional passenger traffic (as measured in RPKs) decreased by approximately 90.9% from approximately RMB5,046 million in 2019 to approximately RMB458 million in 2020. The number of passengers carried on Hong Kong, Macau and Taiwan routes decreased by approximately 90.6% from approximately 3.7 million in 2019 to approximately 0.3 million in 2020. Our passenger-kilometers yield for regional routes increased from approximately RMB0.74 per passenger-kilometer in 2019 to approximately RMB0.90 per passenger-kilometer in 2020.

Our international passenger traffic revenues amounted to approximately RMB8,467 million in 2020, which accounted for approximately 17.2% of our total passenger traffic revenues in 2020, decreased by approximately 75.1% from approximately RMB33,966 million in 2019, primarily due to decreased international passenger demand and decrease in our scheduled flights on international routes resulting from the COVID-19 pandemic. Our international passenger traffic (as measured in RPKs) decreased by approximately 85.6% from approximately RMB73,812 million in 2019 to approximately RMB10,609 million in 2020. The number of passengers carried on international routes decreased by approximately 87.3% from approximately 17.6 million in 2019 to approximately 2.2 million in 2020. Our passenger-kilometers yield for international routes increased from approximately RMB0.47 per passenger-kilometer in 2019 to approximately RMB0.82 per passenger-kilometer in 2020.

Cargo and mail revenues

Our cargo and mail traffic revenues accounted for approximately 9.0% of our total traffic revenues in 2020 and increased by approximately 27.9% from RMB3,826 million in 2019 to RMB4,895 million in 2020, primarily due to the passenger flights to transport pandemic prevention supplies. Cargo and mail yield increased from approximately RMB1.29 per freight tonne-kilometers in 2019 to approximately RMB2.23 per freight tonne-kilometers in 2020.

Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and mail revenues) accounted for approximately 15.4% of our total cargo and mail traffic revenues in 2020 and decreased by approximately 24.7% from RMB998 million in 2019 to RMB751 million in 2020, primarily due to the above-mentioned reason. Our freight tonne-kilometers yield for domestic routes was approximately RMB1.05 per freight tonne-kilometers in 2019 and approximately RMB0.97 per freight tonne-kilometers in 2020.

 

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Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and Taiwan cargo and mail traffic revenues) amounted to approximately RMB84 million in 2020, which accounted for approximately 1.7% of our total cargo and mail traffic revenues in 2020, decreased by approximately 47.2% from approximately RMB159 million in 2019. Our freight tonne-kilometers yield for regional routes was approximately RMB5.56 per freight tonne-kilometers in 2019 and approximately RMB8.91 per freight tonne-kilometers in 2020.

International cargo and mail traffic revenues accounted for approximately 82.9% of our total cargo and mail traffic revenues in 2020 and increased by approximately 52.1% from approximately RMB2,669 million in 2019 to approximately RMB4,060 million in 2020, primarily due to the above-mentioned reason. Our freight tonne-kilometers yield for international routes was approximately RMB1.34 per freight tonne-kilometers in 2019 and approximately RMB2.87 per freight tonne-kilometers in 2020.

Other revenues

We also generated revenues from other services, including tour operations, airport ground services and ticket handling services. These services include aircraft cleaning and ground transportation of cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International Airport and Pudong International Airport. Our total other revenues decreased by approximately 31.5% from approximately RMB6,744 million in 2019 to approximately RMB4,617 million in 2020, primarily due to the impact of the COVID-19 pandemic.

Operating Expenses

The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2019 and 2020:

 

                   2019 vs. 2020  
     Year Ended
December 31
     (Increase)      %
Increase
 
     2019      2020      Decrease      (Decrease)  
            (in RMB millions)         

Operating Expenses:

           

Aircraft fuel

     (34,191      (13,840      20,351        (59.5

Take-off and landing charges

     (16,457      (9,331      7,126        (43.3

Depreciation and amortization

     (22,080      (22,255      (175      0.8  

Wages, salaries and benefits

     (24,152      (20,827      3,325        (13.8

Aircraft maintenance

     (3,380      (3,451      (71      2.1  

Impairment charges

     (4      (184      (180      4,500.0  

Impairment losses on financial assets, net

     (16      (32      (16      100.0  

Food and beverages

     (3,667      (1,589      2,078        (56.7

Low value and short-term lease rentals

     (631      (358      273        (43.3

Selling and marketing expenses

     (4,134      (1,570      2,564        (62.0

Civil aviation development fund

     (1,831      —          1,831        (100.0

Ground services and other expenses

     (2,476      (872      1,604        (64.8

Fair value changes of financial asset at fair value through profit or loss

     25        (26      (51      (204.0

Indirect operating expenses

     (5,113      (3,930      1,183        (23.1

Total Operating Expenses

     (118,107      (78,265      39,842        (33.7

Our total operating expenses decreased by approximately 33.7% from approximately RMB118,107 million in 2019 to approximately RMB78,265 million in 2020. As affected by the COVID-19 pandemic, the passenger traffic volume and number of passengers carried significantly reduced, and our various costs such as aircraft fuel, aircraft take-off and landing costs and catering also decreased from last year.

Aircraft fuel costs decreased by approximately 59.5% from approximately RMB34,191 million in 2019 to approximately RMB13,840 million in 2020. The decrease was due to a decline in our fuel consumption by 38.5% and a drop in the average price of fuel by 34.2% from last year, both of which are attributable to the impact of the COVID-19 pandemic.

Take-off and landing charges decreased by 43.3% from approximately RMB16,457 million in 2019 to approximately RMB9,331 million in 2020, primarily due to the significant decrease in traffic volume as we significantly adjusted our flight capacity as a result of the significant decrease in passenger travel demand as affected by the COVID-19 pandemic.

Depreciation and amortization remaining relatively stable at approximately RMB22,080 million in 2019 and approximately RMB22,255 million in 2020.

 

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Wages, salaries and benefits, which accounted for approximately 26.6% of our total operating expenses in 2020, decreased by approximately 13.8% from approximately RMB24,152 million in 2019 to approximately RMB20,827 million in 2020, primarily due to the decrease in number of flights, leading to the decrease in remuneration of aircrew and ground crew.

Aircraft maintenance expenses was approximately RMB3,451 million in 2020, which accounted for approximately 4.4% of our total operating expenses in 2020, remaining relatively stable as last year.

Food and beverages expenses decreased by approximately 56.7% from approximately RMB3,667 million in 2019 to approximately RMB1,589 million in 2020, primarily due to the significant decrease in traffic volume as we adjusted our flight capacity as a result of the significant decrease in passenger travel demand as affected by the COVID-19 pandemic.

Selling and marketing expenses decreased by approximately 62.0% from approximately RMB4,134 million in 2019 to approximately RMB1,570 million in 2020, primarily due to the significant decrease in a variety of our businesses in line with the deceased relevant opearting cost as a result of the significant decrease in passenger travel demand as affected by the COVID-19 pandemic.

We recorded no civil aviation development fund to the CAAC in 2020 while our civil aviation development fund to the CAAC was RMB1,831 million in 2019, due to CAAC’s exemption of contribution to the civil aviation development fund as a result of the impanct of the COVID-19 pandemic.

Ground services and other expenses decreased by approximately 64.8% from approximately RMB2,476 million in 2019 to approximately RMB872 million in 2020, primarily due to the significant decrease in a variety of our businesses in line with the deceased relevant opearting cost as a result of the significant decrease in passenger travel demand as affected by the COVID-19 pandemic.

Indirect operating expenses decreased by approximately 23.1% from approximately RMB5,113 million in 2019 to approximately RMB3,930 million in 2020, primarily due to the significant decrease in a variety of our businesses in line with the deceased relevant opearting cost as a result of the significant decrease in passenger travel demand as affected by the COVID-19 pandemic.

Other Operating Income and Gains

Our other operating income and gains mainly consist of co-operation routes income, income from disposal of property, plant and equipment and subsidy income. The total amount of our other operating income and gains decreased by approximately 20.9% from approximately RMB7,202 million in 2019 to approximately RMB5,698 million in 2020, primarily due to the significant reduction in our income from joint routes as a result of the impact of the COVID-19 pandemic.

Finance Income/Costs

In 2020, our finance income amounted to approximately RMB2,660 million, increased significantly from approximately RMB96 million in 2019; our finance costs amounted to RMB5,213 million, representing a decrease of 15.4% from approximately RMB6,160 million in 2019, which were primarily due to our exchange gains of RMB2,494 million in 2020, as compared to the exchange losses of RMB990 million in 2019.

Loss/Profit Attributable to the Equity Holders of the Company

As a result of the foregoing, we recorded a net loss attributable to the equity holders at approximately RMB11,836 million in 2020 while the net profit attributable to the equity holders amounted to approximately RMB3,192 million in 2019, primarily due to the significant reduction in our revenue as a result of the impact of the COVID-19 pandemic.

Property, Plant and Equipment

We had approximately RMB101,043 million of property, plant and equipment as of December 31, 2020, including, among other assets, aircraft, engines and flight equipment, remaining relatively stable as compared to approximately RMB99,437 million as of December 31, 2019.

2019 Compared to 2018

Our revenues increased by approximately 5.0% from approximately RMB115,278 million in 2018 to approximately RMB120,986 million in 2019.

 

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In 2019, we transported approximately 130 million passengers, representing an increase of approximately 7.5%, from approximately 121 million passengers in 2018. Our total passenger traffic (as measured in RPKs) increased by approximately 10.1%, from approximately 201,486 million in 2018 to approximately 221,779 million in 2019.

Our total cargo and mail traffic (as measured in RFTKs) increased by approximately 14.8% from approximately 2,588 million in 2018 to approximately 2,971 million in 2019.

Our average yield for our passenger operations remained relatively stable at RMB0.54 per passenger-kilometers in 2018 and RMB0.52 per passenger-kilometers in 2019.

Our average yield for our cargo and mail operations decreased by approximately 8.1% from approximately RMB1.40 per freight tonne-kilometers in 2018 to RMB1.29 per freight tonne-kilometers in 2019.

The following chart sets forth our revenue breakdown for 2018 and 2019:

 

     Year Ended
December 31
     2019 vs. 2018  
     2018      2019      Increase      %
Increase
 
                   (Decrease)      (Decrease)  
            (in RMB millions)         

Traffic revenues

     107,936        114,242        6,306        5.8  

Passenger revenue

     104,309        110,416        6,107        5.9  

Cargo and mail revenue

     3,627        3,826        199        5.5  

Others (1)

     7,342        6,744        (598      (8.1

Total Operating Revenue

     115,278        120,986        5,708        5.0  

Notes:

 

(1)

Including tour operations income, ground service income, commission income and others.

Passenger revenues

Our passenger traffic revenues increased by approximately RMB6,107 million, or approximately 5.9%, from approximately RMB104,309 million in 2018 to approximately RMB110,416 million in 2019. This increase was primarily due to increased passenger demand and increase in scheduled flights.

Our domestic passenger traffic revenues (excluding Hong Kong, Macau and Taiwan passenger revenues) amounted to approximately RMB72,764 million in 2019, which accounted for approximately 65.9% of our total passenger traffic revenues in 2019, increased by approximately 6.0% from approximately RMB68,619 million in 2018, primarily due to increased passenger demand. Our domestic passenger traffic (as measured in RPKs) increased by approximately 10.9% from approximately 128,906 million in 2018 to approximately 142,921 million in 2019. The number of passengers carried on domestic routes increased by approximately 7.7% from approximately 101 million in 2018 to approximately 109 million in 2019. Our passenger-kilometers yield for domestic routes remained relatively stable at approximately RMB0.56 per passenger-kilometer in 2018 and approximately RMB0.54 per passenger-kilometer in 2019.

Our regional passenger traffic revenues (representing Hong Kong, Macau and Taiwan passenger revenues) amounted to approximately RMB3,686 million in 2019, which accounted for approximately 3.3% of our total passenger traffic revenues in 2019, decreased by approximately 3.5% from approximately RMB3,821 million in 2018, primarily due to the decrease of passenger volume. Our regional passenger traffic (as measured in RPKs) decreased by approximately 4.6% from approximately 5,289 million in 2018 to approximately 5,046 million in 2019. The number of passengers carried on Hong Kong, Macau and Taiwan routes decreased by approximately 4.1% from approximately 3.9 million in 2018 to approximately 3.7 million in 2019. Our passenger-kilometers yield for regional routes remained relatively stable at approximately RMB0.73 per passenger-kilometer in 2018 and approximately RMB0.74 per passenger-kilometer in 2019.

Our international passenger traffic revenues amounted to approximately RMB33,966 million in 2019, which accounted for approximately 30.8% of our total passenger traffic revenues in 2019, increased by approximately 6.6% from approximately RMB31,869 million in 2018, primarily due to increased international passenger demand and increase in our scheduled flights on international routes. Our international passenger traffic (as measured in RPKs) increased by approximately 9.7% from approximately 67,290 million in 2018 to approximately 73,812 million in 2019. The number of passengers carried on international routes increased by approximately 9.2% from approximately 16.1 million in 2018 to approximately 17.6 million in 2019. Our passenger-kilometers yield for international routes remained relatively stable at approximately RMB0.49 per passenger-kilometer in 2018 and approximately RMB0.47 per passenger-kilometer in 2019.

 

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Cargo and mail revenues

Our cargo and mail traffic revenues accounted for approximately 3.4% of our total traffic revenues in 2019 and increased by approximately 5.5% from RMB3,627 million in 2018 and approximately RMB3,826 million in 2019. Cargo and mail yield remained relatively stable at approximately RMB1.4 per freight tonne-kilometers in 2018 and approximately RMB1.3 per freight tonne-kilometers in 2019.

Our domestic cargo and mail traffic revenues (excluding Hong Kong, Taiwan and Macau cargo and mail revenues) accounted for approximately 26.1% of our total cargo and mail traffic revenues in 2019 and remained relatively stable at approximately RMB989 million in 2018 and approximately RMB998 million in 2019. Our freight tonne-kilometers yield for domestic routes was approximately RMB1.12 per freight tonne-kilometers in 2018 and approximately RMB1.05 per freight tonne-kilometers in 2019.

Our regional cargo and mail traffic revenues (representing Hong Kong, Macau and Taiwan cargo and mail traffic revenues) amounted to approximately RMB159 million in 2019, which accounted for approximately 4.2% of our total cargo and mail traffic revenues in 2019, decreased by approximately 18.9% from approximately RMB196 million in 2018, mainly due to the decreased cargo transportation demand. Our freight tonne-kilometers yield for regional routes remained relatively stable at approximately RMB5.57 per freight tonne-kilometers in 2018 and approximately RMB5.56 per freight tonne-kilometers in 2019.

International cargo and mail traffic revenues accounted for approximately 69.7% of our total cargo and mail traffic revenues in 2019 and increased by approximately 9.3% from approximately RMB2,442 million in 2018 to approximately RMB2,669 million in 2019. Our freight tonne-kilometers yield for international routes was approximately RMB1.47 per freight tonne-kilometers in 2018 and approximately RMB1.34 per freight tonne-kilometers in 2019.

Other revenues

We also generated revenues from other services, including tour operations, airport ground services and ticket handling services. These services include aircraft cleaning and ground transportation of cargo and passenger luggage for aircraft arriving at or departing from Hongqiao International Airport and Pudong International Airport of Shanghai. We are currently the principal provider of airport ground services at both Hongqiao International Airport and Pudong International Airport. Our total other revenues decreased by approximately 8.1% from approximately RMB7,342 million in 2018 to approximately RMB6,744 million in 2019, primarily due to the decrease in the revenue generating from tourism services as a result of the disposal of Shanghai Airlines Tour in 2019.

Operating Expenses

The following chart sets forth a breakdown of our operating expenses for the years ended December 31, 2018 and 2019:

 

                   2018 vs. 2019  
     Year Ended
December 31
     (Increase)      % Increase  
     2018      2019      Decrease      (Decrease)  
            (in RMB millions)         

Operating Expenses:

           

Aircraft fuel expenses

     (33,680      (34,191      (511      1.5  

Take-off and landing charges

     (14,914      (16,457      (1,543      10.3  

Depreciation and amortization

     (15,313      (22,080      (6,767      44.2  

Wages, salaries and benefits

     (22,134      (24,152      (2,018      9.1  

Aircraft maintenance

     (3,738      (3,380      358        (9.6

Impairment charges

     (318      (4      314        (98.7

Impairment losses on financial assets, net

     (27      (16      11        (40.7

Food and beverages

     (3,383      (3,667      (284      8.4  

Low value and short-term lease rentals

     —          (631      (631      100.0  

Aircraft operating lease rentals

     (4,306      —          4,306        (100.0

Other operating lease rentals

     (928      —          928        (100.0

Selling and marketing expenses

     (3,807      (4,134      (327      8.6  

Civil aviation development fund

     (2,235      (1,831      404        (18.1

Ground services and other expenses

     (2,845      (2,476      369        (13.0

Fair value changes of financial asset at fair value through profit or loss

     (27      25        52        (192.6

Fair value changes of derivative financial instruments

     311        —          (311      (100.0

Indirect operating expenses

     (5,217      (5,113      104        (2.0

Total Operating Expense

     (112,561      (118,107      (5,546      4.9  

 

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Our total operating expenses increased by approximately 4.9% from approximately RMB112,561 million in 2018 to approximately RMB118,107 million in 2019. Under the influence of further expansion of our operational scale as well as the rapid growth in the passenger traffic volume and the number of passengers carried, our various costs such as aircraft fuel expenses, aircraft take-off and landing costs, catering, depreciation and amortization increased from 2018. Our total operating expenses accounted for approximately 97.6% of our operating revenue in 2019, remaining the same as 2018.

Aircraft fuel expenses increased by approximately 1.5% from approximately RMB33,680 million in 2018 to approximately RMB34,191 million in 2019. The increase was primarily due to an increase in our volume of refueling of 6.8% as compared to 2018, leading to an increase in aircraft fuel costs of RMB2,289 million, partially offset by the decrease in average price of fuel of 4.9% as compared to 2018, leading to a decrease in aircraft fuel costs of RMB1,778 million.

Take-off and landing charges increased by 10.3% from approximately RMB14,914 million in 2018 to approximately RMB16,457 million in 2019, primarily due to the expansion of our operational scale and the growth in the number of take-off and landing flight and passenger transportation volume.

Depreciation and amortization increased by approximately 44.2% from approximately RMB15,313 million in 2018 to approximately RMB22,080 million in 2019, primarily due to the effect of the initial adoption of IFRS 16 Leases. For details of the impact of IFRS 16 Leases on us, please refer to the section headed “Critical Accounting Policies” under Item 5.

Wages, salaries and benefits, which accounted for approximately 20.4% of our total operating expenses in 2019, increased by approximately 9.1% from approximately RMB22,134 million in 2018 to approximately RMB24,152 million in 2019, primarily due to the increase in the remuneration as a result of the increase in the number of operation support staff in line with the growth in the flight hours and expansion of our operational scale.

Aircraft maintenance expenses, which accounted for approximately 2.9% of our total operating expenses in 2019, decreased by approximately 9.6% from approximately RMB3,738 million in 2018 to approximately RMB3,380 million in 2019, primarily due to the capitalization of part of our maintenance expenses in accordance with IFRS 16 Leases.

Food and beverage expenses increased by approximately 8.4% from approximately RMB3,383 million in 2018 to approximately RMB3,667 million in 2019, primarily due to the increase in the number of passengers carried.

Other operating lease rentals decreased by approximately 100.0% from approximately RMB928 million in 2018, primarily due to the effect of the initial adoption of IFRS 16 Leases.

Selling and marketing expenses increased by approximately 8.6% from approximately RMB3,807 million in 2018 to approximately RMB4,134 million in 2019, in line with our increased sales.

The amount of civil aviation development fund to the CAAC decreased by approximately 18.1% from approximately RMB2,235 million in 2018 to approximately RMB1,831 million in 2019, primarily due to the decrease in the charging standard of civil aviation development fund in 2019.

Ground services and other expenses decreased by approximately 13.0% from approximately RMB2,845 million in 2018 to approximately RMB2,476 million in 2019, primarily due to the decrease in expenses resulting from the disposal of 65% of equity interests of Shanghai Airlines Tours.

Indirect operating expenses amounted to approximately RMB5,113 million in 2019, remaining relatively stable as compared to approximately RMB5,217 million in 2018.

Fair Value Changes of Derivative Financial Instruments

We did not record changes in fair value of derivative financial instruments in 2019, primarily due to no fair value hedging in 2019. A gain on fair value changes of derivative financial instruments of approximately RMB311 million was recorded in 2018.

Other Operating Income and Gains

Our other operating income and gains mainly consists of co-operation routes income, income from disposal of property, plant and equipment and subsidy income. The total amount of our other operating income and gains increased by approximately 9.3% from approximately RMB6,592 million in 2018 to approximately RMB7,202 million in 2019, primarily due to the increase of co-operation routes income of approximately RMB900 million.

 

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Net Finance Costs

In 2019, our finance costs amounted to approximately RMB6,160 million in 2019, representing an increase of approximately RMB393 million from approximately RMB5,767 million in 2018, primarily due to the effect of the initial adoption of IFRS 16 Leases.

Profit Attributable to the Equity Holders of the Company

As a result of the foregoing, the net profit attributable to the equity holders of the Company increased by approximately 18.3% from approximately RMB2,698 million in 2018 to approximately RMB3,192 million in 2019, primarily due to the increase in traffic revenues in 2019.

Property, Plant and Equipment

We had approximately RMB99,437 million of property, plant and equipment as of December 31, 2019, including, among other assets, aircraft, engines and flight equipment, representing a decrease of 44.8% from approximately RMB180,104 million as of December 31, 2018. The decrease was mainly due to the effect of the initial adoption of IFRS 16 Leases.

Inflation

According to the National Bureau of Statistics of China, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 2.0% in 2016, 1.6% in 2017, 2.1% in 2018, 2.9% in 2019 and 2.5% in 2020. Although neither inflation nor deflation in the past had any material adverse impact on our results of operations, we cannot assure you that the deflation or inflation of the Chinese economy in the future would not materially and adversely affect our financial condition and results of operations.

B. Liquidity and Capital Resources

We finance our working capital requirements through various financing channels, including a combination of funds generated from operations, bank loans, the issuance of corporate bonds and super short-term debentures. As a result, our liquidity could be materially and adversely affected if there is any deterioration in debt and equity capital markets, any delay in obtaining bank loans or a significant decrease in demand for our services.

As of December 31, 2018, 2019 and 2020, we had RMB646 million, RMB1,350 million and RMB7,651 million, respectively, in cash and cash equivalents; RMB55,152 million, RMB51,872 million and RMB87,917 million, respectively, in outstanding borrowings; and RMB16 million, RMB6 million and RMB12 million, respectively, in restricted bank deposits and short-term bank deposits. Our cash and cash equivalents primarily consist of cash on hand and deposits that are placed with banks and other financial institutions. We plan to use the remaining available cash for other capital expenditures, including expenditures for aircraft, engines and related equipment, as well as for working capital and other day-to-day operating purposes.

In addition, our current liabilities exceeded our current assets by approximately RMB77,310 million as of December 31, 2020. Therefore, our directors have taken active steps to seek additional sources of financing to improve our liquidity position. As of December 31, 2020, we had total unutilized credit facilities of RMB33.67 billion from various banks. See the discussion below under “– Working Capital and Liabilities”.

We believe that our current cash, cash equivalents, anticipated cash flow from operations, and the ability to obtain sufficient financing will enable us to operate, as well as to meet our anticipated cash needs for working capital and capital expenditure requirements for at least the next 12 months. However, additional cash may be required due to changing business conditions or other future developments, including any investments or acquisitions that we may decide to pursue.

Cash Flows from Operating Activities

In 2020, we generated a net cash inflow from operating activities of RMB1,211 million as a result of cash generated from operations of RMB1,480 million less income tax paid in 2020. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB8,534 million and negative changes in working capital of RMB7,054 million. The operating profit before working capital changes of RMB8,534 million was a result of the loss before income tax of RMB16,488 million, mainly adjusted for: (i) depreciation of property, plant and equipment, depreciation of right-of-use assets and amortization of other non-current assets of RMB22,004 million, (ii) interest expenses of RMB5,214 million and (iii) net foreign exchange gains of RMB2,746 million. Negative changes in working capital mainly consisted of (i) contract liabilities of RMB6,686 million, (ii) other long-term liabilities of RMB2,174 million and (iii) other payables and accruals of RMB983 million, partly offset by (i) prepayments and other receivables of RMB2,893 million and (ii) trade receivables of RMB593 million.

In 2019, we generated a net cash inflow from operating activities of RMB28,972 million as a result of cash generated from operations of RMB30,137 million less income tax paid in 2019. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB32,043 million and negative changes in working capital of RMB1,906 million. The operating profit before working capital changes of RMB32,043 million was a result of the profit before income tax of RMB4,299 million, mainly adjusted for: (i) depreciation of property, plant and equipment, depreciation of right-of-use assets and amortization of other non-current assets of RMB21,912 million, (ii) interest expenses of RMB5,169 million and (iii) net foreign exchange losses of RMB890 million. Negative changes in working capital mainly consisted of (i) prepayments and other receivables of RMB2,336 million and (ii) other long-term liabilities of RMB1,916 million, partly offset by (i) other payables and accruals of RMB1,459 million and (ii) contract liabilities of RMB1,281 million.

 

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In 2018, we generated a net cash inflow from operating activities of RMB22,338 million as a result of cash generated from operations of RMB24,047 million less income tax we paid in 2018. Our cash generated from operations was mainly due to operating profit before working capital changes of RMB24,115 million and negative changes in working capital of RMB68 million. The operating profit before working capital changes of RMB24,115 million was a result of the profit before income tax of RMB3,856 million, mainly adjusted for: (i) depreciation of property, plant and equipment and amortization of other non-current assets of RMB15,084 million, (ii) interest expenses of RMB3,727 million and (iii) net foreign exchange losses of RMB1,983 million. Negative changes in working capital mainly consisted of (i) prepayments and other receivables of RMB2,056 million and (ii) other long-term liabilities of RMB525 million, partly offset by (i) contract liabilities of RMB1,051 million and (ii) trade and

bills payables of RMB856 million.

Cash Flows from Investing Activities

In 2020, our net cash outflow from investing activities was RMB6,283 million. Our net cash outflow for investing activities mainly consisted of additions to property, plant and equipment and other non-current assets of RMB7,247 million. These cash outflows were partly offset by proceeds from disposal of property, plant and equipment of RMB894 million.

In 2019, our net cash outflow from investing activities was RMB4,899 million. Our net cash outflow for investing activities mainly consisted of additions to property, plant and equipment and other non-current assets of RMB7,589 million. These cash outflows were partly offset by proceeds from novation of purchase rights of RMB2,366 million.

In 2018, our net cash outflow from investing activities was RMB12,780 million. Our net cash outflow for investing activities mainly consisted of (i) advanced payments on acquisition of aircraft of RMB15,342 million and (ii) additions of property, plant and equipment of RMB10,653 million. These cash outflows were partly offset by (i) proceeds from novation of purchase rights of RMB7,483 million and (ii) proceeds from disposal of property, plant and equipment of RMB5,493 million.

Cash Flows from Financing Activities

In 2020, our net cash inflow from financing activities was RMB11,426 million. Our net cash inflow for financing activities mainly consisted of (i) proceeds from issuance of short-term debentures of RMB77,200 million, (ii) proceeds from draw-down of short-term bank loans of RMB28,883 million, (iii) proceeds from draw-down of long-term bank loans of RMB10,823 million and (iv) proceeds from issuance of long-term debentures and bonds of RMB1,998 million. These cash outflows were partly offset by (i) repayments of short-term debentures of RMB69,200 million, (ii) repayments of principal of lease liabilities of RMB18,439 million, (iii) repayments of short-term bank loans of RMB9,130 million, (iv) repayments of long-term debentures and bonds of RMB2,453 million and (v) repayments of long-term bank loans of RMB1,948 million.

In 2019, our net cash outflow from financing activities was RMB23,375 million. Our net cash outflow for financing activities mainly consisted of (i) repayments of short-term debentures of RMB35,000 million, (ii) repayments of principal of lease liabilities of RMB23,895 million, (iii) repayments of short-term bank loans of RMB12,868 million, (iv) repayments of long-term debentures and bonds of RMB5,567 million and (v) repayments of long-term bank loans of RMB4,033 million. These cash outflows were partly offset by (i) proceeds from issuance of short-term debentures of RMB39,000 million, (ii) proceeds from issue of shares of RMB9,442 million, (iii) proceeds from issuance of long-term debentures and bonds of RMB7,755 million and (iv) proceeds from draw down of short-term bank loans of RMB6,986 million.

In 2018, our net cash outflow from financing activities was RMB13,558 million. Our net cash outflow for financing activities mainly consisted of (i) repayments of short-term bank loans of RMB36,066 million, (ii) repayments of short-term debentures of RMB26,500 million, (iii) repayments of principal of finance lease obligations of RMB9,629 million and (iv) repayments of long-term bank loans of RMB7,592 million. These cash outflows were partly offset by (i) proceeds from issuance of short-term debentures of RMB31,000 million, (ii) proceeds from draw down of short-term bank loans of RMB19,144 million, (iii) proceeds from draw down of long-term bank loans and other financing activities of RMB18,693 million and (iv) proceeds from issuance of long-term debentures and bonds of RMB2,938 million.

Working Capital and Liabilities

We have, and in the future may continue to have, substantial debts. In addition, we generally operate with a working capital deficit. As of December 31, 2020, our current liabilities exceeded our current assets by RMB77,310 million. In comparison, our current liabilities exceeded our current assets by RMB58,620 million as of December 31, 2019. Our current liabilities increased by 27.4% from RMB78,363 million as of December 31, 2019 to RMB99,808 million as of December 31, 2020, primarily due to the increase in the current portion of lease liabilities. Our current assets increased by 14.0% from RMB19,743 million as of December 31, 2019 to RMB22,498 million as of December 31, 2020, primarily due to the increase in cash and cash equivalents. Short-term loans outstanding totaled RMB25,233 million and RMB57,150 million as of December 31, 2019 and 2020, respectively. Long-term outstanding bank loans totaled RMB26,604 million and RMB30,745 million as of December 31, 2019 and 2020, respectively.

As of December 31, 2020, our debt ratio, representing total liabilities divided by total assets, was 79.2%. The interest expenses associated with these debts may impair our future profitability. We expect that cash from operations and bank borrowings will be sufficient to meet our operating cash flow requirements, although events that materially and adversely affect our operating results can also have a negative impact on liquidity.

 

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Our consolidated interest-bearing borrowings as of December 31, 2019 and 2020 for the purpose of calculating the indebtedness were as

follows:

 

     As of December 31,  
     2019      2020  
     (in RMB millions)  

Secured

     19,335        22,897  

Unsecured

     32,537        65,020  

Total

     51,872        87,917  

Our maturity profile of interest-bearing borrowings as of December 31, 2019 and 2020 was as follows:

 

     As of December 31,  
     2019      2020  
     (in RMB millions)  

Within one year

     25,235        57,153  

In the second year

     8,111        5,948  

In the third to fifth year inclusive

     14,845        17,685  

After the fifth year

     3,681        7,131  

Total

     51,872        87,917  

As of December 31, 2020, our interest rates relating to short-term borrowings ranged from 1.21% to 3.30%, while our fixed interest rates on our interest-bearing borrowings for long-term bank loans ranged from 2.40% to 3.92%. Our bank loans are denominated in Renminbi, U.S. dollars , Singapore dollars and Euros. As of December 31, 2020, our total bank loans denominated in Renminbi amounted to RMB31,151 million, our total bank loans denominated in U.S. dollars amounted to US$57 million and our total bank loans denominated in EUR amounted to EUR332 million.

On March 16, 2018, we issued JPY-denominated credit enhanced bonds (Series 1 JPY10,000,000,000 0.33% Bonds due 2021, Series 2 JPY20,000,000,000 0.64% Bonds due 2021 and Series 3 JPY20,000,000,000 0.64% Bonds due 2021), which was listed on the professional oriented TOKYO PRO-BOND Market of the Tokyo Stock Exchange on March 19, 2018.

On March 5, 2019, we issued three-year medium-term bonds with a principal amount of RMB3 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 3.70% per annum, which is payable annually. The principal of the bonds will mature and become repayable on March 7, 2022.

On August 19, 2019, we issued five-year corporate bonds with a total principal amount of RMB3 billion. The bonds bear interest at the rate of 3.60% per annum, which is payable annually. The principal of the bonds will mature and become repayable on August 20, 2024.

On December 6, 2019, Eastern Air Overseas (Hong Kong) Co., Ltd. issued three-year corporate bonds with a principal amount of KRW300 billion, at an issue price equal to the face value of the bonds. The bonds bear interest at the rate of 2.40% per annum, which is payable annually. The principal of the bonds will mature and become repayable on December 6, 2022. We have unconditionally and irrevocably guaranteed the due payment and performance of the above bonds.

On April 24, 2020, we issued three-year corporate bonds with a total principal amount of RMB2 billion. The bonds bear interest at the rate of 2.39% per annum, which is payable annually. The principal of the bonds will mature and become repayable on April 28, 2023. See Note 36 to the consolidated financial statements for the issuance of bonds.

We have entered into credit facility agreements to meet our future working capital needs. However, our ability to obtain financing may be affected by: (i) our results of operations, financial condition, cash flows and credit ratings; (ii) costs of financing in line with prevailing economic conditions and the status of the global financial markets; and (iii) our ability to obtain PRC government approvals required to access domestic or international financing or to undertake any project involving significant capital investment, which may include one or more approvals from the NDRC, SAFE, MOFCOM and/or the CSRC depending on the circumstances. If we are unable to obtain financing, for whatever reason, for a significant portion of our capital requirements, our ability to acquire new aircraft and to expand our operations may be materially and adversely affected.

Capital Expenditures

As of December 31, 2020, according to the relevant agreements, we expect our capital expenditures for aircraft, engines and related equipment to be in aggregate approximately RMB37,277 million, including approximately RMB13,542 million in 2021 and approximately RMB13,692 million in 2022, in each case subject to contractually stipulated increases or any increase relating to inflation.

We plan to finance our other capital commitments through a combination of funds generated from operations, existing credit facilities, bank loans, leasing arrangements and other external financing arrangements.

C. Research and Development, Patents and Licenses, etc.

None.

 

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D. Trend Information

Other than as disclosed elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2020 to December 31, 2020 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements other than our capital commitments:

 

  (1)

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity;

 

  (2)

We have not entered into any obligations under any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements; and

 

  (3)

We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

F. Tabular Disclosure of Contractual Obligations

Contractual Obligations and Commercial Commitments

The following tables set forth selected information regarding our outstanding contractual and commercial commitments as of December 31, 2020:

 

     Total      Less Than
1 Year
     1-2 Years      2-4 Years      More Than
4 Years
 

Long-Term Debt (1)

     14,690        1,526        1,149        6,748        5,267  

Lease Liabilities (2)

     96,251        14,073        13,141        23,664        45,373  

Unconditional Purchase Obligations (3)

     37,277        13,542        13,692        10,043        —    

Other Long-term Obligations (4)(5)

     1,955        —          —          —          —    

Post-retirement Benefit Obligations (4)

     2,538        —          —          —          —    

Short-term Bank Loans (6)

     21,966        21,966        —          —          —    

Interest Obligations

              

Under Lease Liabilities

     14,761        3,370        2,868        4,350        4,173  

Under Bank Loans

     2,408        854        350        491        713  

Fixed Rate

     737        551        103        83        —    

Variable Rate (7)

     1,671        303        247        408        713  

Notes:

 

(1)

Excludes interest.

(2)

Primarily comprise amounts to be paid under leases for the aircraft and engines.

(3)

Primarily comprise capital expenditures.

(4)

Figures of payments due by period are not available.

(5)

Other long-term obligations mainly include long-term duties and levies payable, and other long-term payables.

(6)

Short-term bank loans are generally repayable within one year. As of December 31, 2020, the weighted average interest rate of our short-term bank loans was 2.17% per annum (2019: 3.30%).

(7)

For our variable rate loans, interest rates range from three months Euribor + 0.50% to five years LPR – 0.44%. Interest obligations relating to variable rate loans are calculated based on the relevant variable rates as of December 31, 2020. A 25 basis points increase in the interest rate would increase interest expenses by RMB126 million.

 

     Total      Amount of Commitment Expiration Per Period  
Other Commercial    Amounts      Less Than                    After  
Commitments/Credit Facilities    Committed      1 Year      1-3 Years      4-5 Years      5 Years  
            (RMB in millions)                

Lines of Credit

     33,667        5,700        2,103        5,500        20,364  

Standby Letters of Credit

     —          —          —          —          —    

Guarantees

     —          —          —          —          —    

Total

     33,667        5,700        2,103        5,500        20,364  

 

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Taxation

We had carried forward tax losses of approximately RMB15,310 million as of December 31, 2020, which can be mainly used to set off against future taxable income between 2021 and 2028.

Pursuant to the “Notice on the continuation of the Income Tax Policies for Enhancing the Implementation of Western Region Development Strategy.” (Ministry of Finance Announcement [2020] No.23), and other series of tax regulations, enterprises located in the western regions and engaged in the industrial activities as listed in the “Catalogue of Encouraged Industries in Western Regions”, will be entitled to a reduced corporate income tax rate of 15% from 2021 to 2030 upon approval from the tax authorities. China Eastern Airlines Yunnan Co., Ltd. (“CEA Yunnan”), a subsidiary of the Company, obtained approval from the tax authorities and has been entitled to a reduced corporate income tax rate of 15% from January 1, 2011. The Company’s Sichuan branch, Gansu branch and Xibei branch also obtained approvals from the respective tax authorities and are entitled to a reduced corporate income tax rate of 15%. The subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax rate of 16.5% (2019: 16.5%). Eastern E-Commerce, a subsidiary of the Company, qualified for High and New Technology Enterprise (HNTE) status with HNTE certificate No.GR201831003647 issued by the relative authorities, has been entitled to a reduced corporate income tax rate of 15% from January 1, 2018 as approved by the tax authorities.

The Company and its subsidiaries, except for CEA Yunnan, Eastern E-Commerce, Sichuan branch, Gansu branch, Xibei branch and those incorporated in Hong Kong, are generally subject to the PRC standard corporate income tax rate of 25% (2019: 25%).

New Pronouncements

For a detailed discussion of new accounting pronouncements, please see Note 2.3 to the consolidated financial statements.

G. Safe Harbor

See the section headed “Cautionary Statement With Respect To Forward-Looking Statements”.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The following table sets forth certain information concerning our current directors, supervisors and senior management members. Except as disclosed below, none of our directors, supervisors or members of our senior management was selected or chosen as a result of any arrangement or understanding with any major shareholders, customers, suppliers or others. There is no family relationship between any director, supervisor or senior management member and any other director, supervisor or senior management member of our Company.

 

Name

   Age    Shares Owned   

Position

Liu Shaoyong    62    —      Chairman of the Board of Directors
Li Yangmin    57    3,960 A Shares(1)    Vice Chairman of the Board of Directors and President
Tang Bing    54    —      Director
Shao Ruiqing    63    —      Independent Non-executive Director
Cai Hongping    66    —      Independent Non-executive Director
Dong Xuebo    67    —      Independent Non-executive Director
Jiang Jiang    56    —      Employee Representative Director
Guo Lijun    49    —      Chairman of the Supervisory Committee
Fang Zhaoya    52    —      Supervisor
Zhou Huaxin    50    —      Employee Representative Supervisor
Xi Sheng    58    —      Vice President
Zhou Qimin    53    —      Vice President and Chief Financial Officer
Feng Dehua    55    —      Vice President
Cheng Guowei    51    —      Vice President
Liu Tiexiang    55    —      Vice President
Wang Jian    47    —      Board Secretary and Company Secretary

Notes:

 

(1)

Mr. Li Yangmin directly held 3,960 A Shares in the capacity of beneficial owner.

 

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Directors

Mr. Liu Shaoyong, is currently the chairman and party secretary of the Company and chairman and party secretary of CEA Holding. Born in November 1958, Mr. Liu joined the civil aviation industry in 1978 and was appointed as vice president of China General Aviation Corporation, deputy director of Shanxi Provincial Civil Aviation Administration of the PRC, general manager of the Shanxi Branch of the Company, and director general of flight standard department of CAAC. Mr. Liu served as president of the Company from December 2000 to October 2002, vice minister of CAAC from October 2002 to August 2004, president of China Southern Air Holding Company from August 2004 to December 2008, and chairman of China Southern Airlines Co., Limited from November 2004 to December 2008. Mr. Liu served as president and vice party secretary of CEA Holding from December 2008 to December 2016, and became the chairman of the Company since February 2009. He has served as the chairman and party secretary of CEA Holding since December 2016 and the party secretary of the Company since December 2017. Mr. Liu is also currently a member of the 13th National Committee of the Chinese People’s Political Consultative Conference, a council member of the International Air Transport Association, and the vice chairman of the International Advisory Board of School of Management, Fudan University. Mr. Liu graduated from the China Civil Aviation Flight College and obtained a Master of Business Administration degree from Tsinghua University. He holds the title of commanding (senior) pilot.

Mr. Li Yangmin, is currently the vice chairman, president and vice party secretary of the Company, and a director, the president and vice party secretary of CEA Holding. Born in August 1963, Mr. Li joined the civil aviation industry in 1985. He was previously the deputy general manager of the aircraft maintenance base and the manager of air route department of China Northwest Airlines, general manager of the aircraft maintenance base of China Eastern Air Northwest Branch Company and vice president of China Eastern Air Northwest Branch Company. From October 2005 to March 2019, he has also been a vice president of the Company. He served as a safety director of the Company from July 2010 to November 2012. He became a party member of CEA Holding in May 2011. He was a Director of the Company from June 2011 to August 2018 and served as a party secretary of the Company from June 2011 to December 2017. He served as a vice party secretary of CEA Holding since August 2016 and the vice president of CEA Holding from August 2016 to February 2019. Since December 2017, he served as the vice party secretary of the Company. He has served as a director and the president of CEA Holding since February 2019 and the president of the Company since March 2019. He has served as the vice chairman of the Company since May 2019 and vice president of China Association for Public Companies since August 2019. Since November 2019, he has served as a director of Juneyao Airlines. Mr. Li graduated from the Civil Aviation University of China and Northwestern Polytechnical University and obtained an Executive Master of Business Administration degree from Fudan University. He is also a qualified professor-level senior engineer.

Mr. Tang Bing, is currently a Director and vice party secretary of the Company, and a director and vice party secretary of CEA Holding. Born in February 1967, Mr. Tang joined the civil aviation industry in 1993. He served as vice executive president (general manager representing Chinese shareholder) of MTU Maintenance Zhuhai Co., Limited, office director of China Southern Airlines Holding Company and president of Chongqing Airlines Company Limited. From December 2007 to May 2009, he served as chief engineer and general manager of the aircraft engineering department of China Southern Airlines Company Limited. From May 2009 to February 2010, he was appointed as the president of the Beijing Branch of the Company and was the president of Shanghai Airlines Co., Ltd. from February 2010 to December 2011. He served as the chairman and an executive director of Shanghai Airlines Co., Ltd. from January 2012 to January 2018 and a vice president of the Company from February 2010 to March 2019. He was appointed as a party member of CEA Holding in May 2011. He served as a Director of the Company from June 2012 to August 2018, and a vice president of CEA Holding from December 2016 to February 2019. Since February 2019, he served as a director and vice party secretary of CEA Holding, and has served as a vice party secretary of the Company since March 2019, and as a Director of the Company since May 2019. Mr. Tang graduated from Nanjing University of Aeronautics and Astronautics majoring in electrical technology. He obtained a Master of Business Administration degree from the Administration Institute of Sun Yat-sen University, an Executive Master of Business Administration degree from the School of Economics and Management of Tsinghua University and a doctoral degree in national economics from the Graduate School of Chinese Academy of Social Sciences. He is also a qualified senior engineer.

Mr. Shao Ruiqing, is currently an independent non-executive Director. Born in September 1957, Mr. Shao currently serves as a professor in accounting and PhD supervisor at Shanghai Lixin University of Commerce. Mr. Shao served as the deputy dean and dean of the School of Economics and Management of Shanghai Maritime University, and the deputy dean of Shanghai Lixin University of Commerce. Mr. Shao was awarded the special allowance by the State Council of the PRC in 1995. He is currently a consultant professional of the Committee for Accounting Standards of the Ministry of Finance, the deputy head of the Accounting Society of China, a consultative committee member of the Ministry of Transport as an expert in finance and accounting, and the deputy head of China Association of Communications Accountancy. Mr. Shao successively graduated from Shanghai Maritime University, Shanghai University of Finance and Economics and Tongji University with a bachelor’s degree in economics, and master’s and doctoral degrees in management. Mr. Shao has spent two and a half years studying and being a senior visiting scholar in the U.K. and Australia. Mr. Shao has served as an independent non-executive Director since June 2015. Mr. Shao is also an independent non-executive director of China Everbright Bank Co., Ltd. and Shanghai International Port (Group) Co., Ltd., Huayu Automotive Systems Company Limited and Tibet Urban Development and Investment Co., Ltd.

Mr. Cai Hongping, is currently an independent non-executive Director. Born in December 1954, Mr. Cai currently serves as the chairman of AGIC Capital. He is a resident of Hong Kong. He worked for Sinopec Shanghai Petrochemical Company Limited (“Sinopec Shanghai”) from 1987 to 1993. He participated in the listing of Sinopec Shanghai in Hong Kong and the United States (the first company of the PRC to be listed in the stock exchanges of Hong Kong and the United States) and is one of the founders of H shares in the PRC. From 1992 to 1996, he acted as a member of the Overseas Listing Team for Chinese Enterprises under the Restructuring Committee of the State Council and the chairman of the Joint Committee of Board Secretaries for H Share Companies in the PRC. He served as a joint director of the investment banking division of Peregrine Investments Holdings Limited in Asia from 1996 to 2006, chairman of the investment banking division of UBS AG in Asia from 2006 to 2010, chairman of Deutsche Bank in the Asia Pacific region from 2010 to 2015 and chairman of AGIC Capital since February 2015. Since June 2016, Mr. Cai has served as an independent non-executive Director. Mr. Cai is also an independent non-executive director of COSCO SHIPPING Development Co., Ltd., an independent director of Shanghai Pudong Development Bank Co., Ltd and BYD Company Limited and an external director of China National Machinery Industry Corporation. Mr. Cai graduated from Fudan University, majoring in mass communications.

 

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Mr. Dong Xuebo, is currently an independent non-executive Director. Born in February 1954, Mr. Dong served as the deputy mayor of Luoyang City, Henan Province, deputy director of the comprehensive planning department and director of the comprehensive programming department of the Ministry of Transport, assistant to the president of China Merchants Group, general manager of Huajian Transportation Economic Development Center, assistant to the president of China Merchants Group, executive vice chairman, director, CEO and party secretary of China Merchants Highway, and general counsel of China Merchants Group. Since December 2019, he has served as an independent non-executive Director. Currently, Mr. Dong is also an external director of China National Machinery Industry Corporation. Mr. Dong obtained a postgraduate degree.

Mr. Jiang Jiang, is currently an employee representative Director, safety director, chairman of the labor union of the Company, and an employee representative director and chairman of the labor union of CEA Holding. Mr. Jiang joined the civil aviation industry in 1986, and has successively worked in the Civil Aviation Industry Airline Corporation and China General Aviation Corporation. From June 1999 to April 2005, he served as the deputy manager and manager of the flight division of the Shanxi Branch of the Company. From April 2005 to July 2010, he was the deputy general manager of the Shanxi Branch. From July 2010 to June 2014, he served as the general manager and the deputy secretary of the party committee of the Shanxi Branch. From June 2014 to December 2016, he served as the general manager and deputy secretary of the party committee of China Eastern Airlines Wuhan Limited. From December 2016 to February 2017, he has served as the person-in-charge of the safety operation management of the Company. From February 2017 to January 2021, he has served as a vice president and standing member of party committee of the Company. Since July 2020, he has served as the safety director of the Company. Since November 2020, he has served as the chairman of the labor unior of the Company and CEA Holding. Since December 2020, he served as an employee representative director of the Company and CEA Holding. Mr. Jiang graduated from the Flight College of Civil Aviation Flight University of China, majoring in aviation transportation and obtained an Executive Master of Business Administration degree from Fudan University. He has the professional title of senior pilot.

Supervisory Committee

As required by the PRC Company Law and our Articles of Association, our Company has a supervisory committee (the “Supervisory Committee”), whose primary duty is the supervision of our senior management, including our Board of Directors, managers and senior officers. Supervisory Committee consists of three supervisors.

Mr. Guo Lijun, is currently the chairman of the supervisory committee and chief economist of the Company. Mr. Guo joined the civil aviation industry in 1994. Mr. Guo had taken up the position as the officer of the secretariat of the Board. He served as the general manager of the legal department of the Company and the deputy director of the legal department of CEA Holding from April 2009 to August 2014; he served as the general counsel legal adviser of the Company from December 2011 to December 2017; he served as the service director of the Company from July 2013 to June 2014; served as the general manager of the planning and development department of the Company from June 2014 to September 2016; and served as the general manager of the Beijing Branch of the Company from September 2016 to April 2018. Mr. Guo has served as the chief economist of the Company since December 2017. From April 2018 to April 2020, he temporarily served as a member of the Standing Committee of the Wuhu Municipal Committee and Deputy Mayor of Wuhu Municipal Government, Anhui Province. He has served as the chairman of the supervisory committee of the Company since March 2021. Mr. Guo graduated from the Zhongnan University of Economics and Law, majoring in law. He obtained a master’s degree in law from the University of Washington in the United States, a master’s degree in law from Fudan University and an Executive Master of Business Administration degree from Fudan University. Mr. Guo has the title of corporate legal adviser.

Mr. Fang Zhaoya, is currently a supervisor of the Company and the head of the strategic development department of CEA Holding. Mr. Fang joined the civil aviation industry in July 1989. He served as the director of the time control office of the production planning department and the director of the A310/300 workshop of the route department of the maintenance base of China Northwest Airlines Co., Ltd., and the deputy director of the technical maintenance control center (TMCC) for production of the route department and the deputy head of the quality control department of the maintenance base of the Northwest Branch of the Company. He served as the manager of the production planning center of the maintenance management department of China Eastern Air Engineering & Technique Co., Ltd. from September 2006 to August 2009, the manager of the business development department of China Eastern Air Engineering & Technique Co., Ltd. from August 2009 to July 2010, the manager of the aircraft selection and lease and sales management department of China Eastern Air Engineering & Technique Co., Ltd. from August 2010 to May 2015, the deputy general manager of China Eastern Air Engineering & Technique Co., Ltd. from May 2015 to June 2017, and the general manager of the planning department of the Company from June 2017 to April 2019. He has been the head of the strategic development department of CEA Holding since April 2019 and a supervisor of the Company since December 2019. Mr. Fang graduated from the Department of Aviation Machinery of China Civil Aviation Institute majored in thermal power machinery and equipment. He obtained a master’s degree from the Northwestern Polytechnical University majored in aviation engineering, and holds the title of senior engineer.

Mr. Zhou Huaxin, is currently the employee representative supervisor of the Company and the head of group work department of the Company and CEA Holding. Mr. Zhou joined the civil aviation industry in 1993 and served as the deputy director of general office and director of research office of CEA Holding and office director of the Company. He served as the director of general office and director of foreign affairs office (Hong Kong, Macao and Taiwan affairs office) of CEA Holding from June 2014 to August 2017; the party secretary and vice president of the Anhui Branch of the Company from August 2017 to April 2018; and the executive vice president and party member of the Beijing Branch of the Company from April 2018 to September 2020. He has served as the head of group work department of the Company and CEA Holding since September 2020, and the employee representative supervisor of the Company since December 2020. Mr. Zhou graduated from Lanzhou University majoring in Marxism, and obtained a master’s degree in economics from the Renmin University of China majoring in national economic planning and management and an Executive Master of Business Administration degree from the School of Management of Fudan University. He holds a political work specialist title.

 

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Senior Management

Mr. Xi Sheng, is currently a vice president and party member of the Company and a vice president, party member and the chief auditor of CEA Holding. Mr. Xi served as the deputy head of the foreign affairs department II of the foreign funds utilization and application audit department and the head of the liaison and reception office of the foreign affairs department of the National Audit Office of the PRC and the deputy head of the PRC Audit Institute. He was also the deputy head and head of the fixed assets investment audit department of the National Audit Office of the PRC, and the party secretary and a special commissioner of the Harbin office of the National Audit Office of the PRC. He served as the head of the personnel and education department of the National Audit Office of the PRC. He was the head of the audit department of CEA Holding from September 2009 to November 2012. Mr. Xi has served as the chief auditor of CEA Holding since September 2009. From June 2012 to January 2021, he was a Supervisor of the Company. From June 2016 to January 2021, he was the chairman of the Supervisory Committee of the Company. He served as the head of the audit department of CEA Holding from December 2017 to November 2018, and has served as a vice president and party member of CEA Holding since January 2018. From November 2018 to May 2020, he served as the director of audit department of the Company and CEA Holding. Since January 2021, he has served as a vice president and party member of the Company. Mr. Xi is also the vice chairman of China Institute of Internal Audit. Mr. Xi graduated from Jiangxi University of Finance and Economics with undergraduate education background. He is a senior auditor, a Chinese Certified Public Accountant (CPA) and an International Certified Internal Auditor (CIA).

Mr. Zhou Qimin, is currently a vice president, the chief financial officer and a party member of the Company and the chief accountant and a party member of CEA Holding. Mr. Zhou served as deputy head of the Finance Department of the eighth research institute of Shanghai Aerospace Bureau of China Aerospace Corporation, and head of the Finance Department, chief accountant and a member of party committee of the eighth research institute of China Aerospace Science and Technology Corporation. He served as the head of financial department of Commercial Aircraft Corporation of China, Ltd. from April 2008 to October 2016, the deputy chief accountant of Commercial Aircraft Corporation of China, Ltd. from August 2014 to January 2018, the chief accountant of Commercial Aircraft Corporation of China, Ltd. from January 2018 to July 2020, a member of party committee of Commercial Aircraft Corporation of China, Ltd. from January 2018 to July 2018 and standing member of party committee of Commercial Aircraft Corporation of China, Ltd. from July 2018 to July 2020. He has served as the chief accountant and a party member of CEA Holding since July 2020, the chief financial officer of the Company since August 2020, and a vice president and party member of the Company since January 2021. Mr. Zhou graduated from the Faculty of Mathematics of Gannan Normal University, majoring in mathematics. He also graduated from the Faculty of Management Engineering of University of Electronic Science and Technology of China, majoring in industrial management engineering, holds an undergraduate degree and is a researcher-level senior accountant.

Mr. Feng Dehua, is currently a vice president and party member of the Company and a vice president and party member of CEA Holding. Mr. Feng joined the civil aviation industry in 1989 and successively worked in China General Aviation Corporation, the Shanxi Branch of the Company and the sales and marketing system of the Company. From May 2009 to August 2009, Mr. Feng was the executive vice president for sales and marketing of passenger transportation department of the Company. From August 2009 to November 2011, he was the party secretary and vice president for sales and marketing of passenger transportation department of the Company. From November 2011 to August 2014, he was the president and vice party secretary of the Beijing Branch of the Company. From August 2014 to December 2017, he was the secretary of the disciplinary committee of the Company. He has served as a party member of the Company since August 2014. From September 2014 to February 2019, he has been the deputy head of party disciplinary inspection group of CEA Holding. Since December 2017, he has been a vice president of the Company. Since December 2019, he has been a party member and vice president of CEA Holding. Mr. Feng graduated from Shanxi Finance and Economics Institute majoring in commercial business management, and obtained an Executive Master of Business Administration degree from Fudan University. He is qualified as a professor-level senior economist.

Mr. Cheng Guowei, is currently a vice president and party member of the Company and a vice president, party member and the safety director of CEA Holding. Mr. Cheng joined the civil aviation industry in 1994 and served as the deputy chief engineer, chief engineer, director of flight maintenance and general manager of the flight maintenance engineering department of Shanghai Airlines Co., Limited from April 2005 to March 2010, the vice president of Shanghai Airlines Co., Limited from March 2010 to November 2010, the vice president and safety director of Shanghai Airlines Co., Limited from November 2010 to August 2011, the vice president, safety director and secretary of the disciplinary committee of Shanghai Airlines Co., Limited from August 2011 to July 2013, and the party secretary and vice president of Shanghai Airlines Co., Limited from July 2013 to September 2016. He served as the party secretary and vice president of the Northwest Branch of the Company from September 2016 to August 2017, and the president and vice party secretary of the Northwest Branch of the Company from August 2017 to November 2018. He served as the general manager and vice party secretary of China Eastern Airlines Technology Co., Ltd. from November 2018 to December 2019. He has served as a vice president and party member of CEA Holding since December 2019. He has served as a vice president and party member of the Company since January 2020. He served as the Safety Director of the Company from February 2020 to July 2020, and has served as the safety director of CEA Holding since February 2020. Mr. Cheng graduated from Nanjing University of Aeronautics and Astronautics majoring in aerodynamics and obtained a Master of Business Administration degree jointly offered by Beijing University of Technology and American City University. He holds the title of senior engineer.

Mr. Liu Tiexiang, is currently a vice president and party member of the Company and a vice president and party member of CEA Holding. Mr. Liu joined the civil aviation industry in 1983, and served as the manager of the flight training center of training department, the deputy general manager of the aviation safety technology department and the deputy general manager of the flight technology management department of Air China, and the general manager of the flight technology management department, deputy chief and party member of the general fleet and chief and vice party secretary of the general fleet of Air China. From April 2011 to August 2014, he served as the chief pilot of Air China. From March 2012 to January 2013, he also served as the general manager, party member and deputy secretary of the operation control center of Air China, and the deputy chief operating officer of Air China. From January 2013 to August 2014, he also served as the general manager and vice party secretary of the Southwest Branch of Air China. From August 2014 to March 2020, he served as the vice president and party member of Air China. From April 2015 to March 2020, he also served as the chief operating officer of Air China. From May 2016 to March 2020, he also served as the chairman of Beijing Airlines Co., Ltd. Since March 2020, he has served as a vice president and party member of CEA Holding. Since April 2020, he has served as a vice president and party member of the Company. Mr. Liu graduated from the Correspondence Institute of the Party School of the CPC Central Committee majoring in economics and management, and holds the title of commanding senior pilot.

 

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Mr. Wang Jian, is currently the Board secretary of the Company. Mr. Wang joined the civil aviation industry in 1995 and served as deputy head of the Company’s office, the deputy general manager of the Shanghai Business Office of the Company, and the deputy general manager of the Shanghai Business Office of China Southern Airlines Company Limited. He served as the head of the Board office of the Company and a representative of the Company’s securities affairs from May 2009 to April 2012. He has served as the Board secretary of the Company since April 2012. He also served as the head of the Board office of the Company from April 2014 to May 2016. He served as a director and the general manager of Eastern Airlines Industry Investment from November 2016 to February 2019. He has also served as the head of the Board office of the Company since May 2018. He has served as the chairman of Eastern Airlines Industry Investment since February 2019, and also served as a director of AFK since July 2019. During his term as secretary to the Board and his relevant work, he designed and promoted to implement several capital and strategic projects of CEA. Mr. Wang graduated from Shanghai Jiao Tong University and has a Master of Business Administration postgraduate degree from East China University of Science and Technology and an Executive Master of Business Administration degree from Tsinghua University.

Retired Director, Supervisor and Senior Management during the Reporting Period

Mr. Wang Junjin, served as a Director of the Company during the Reporting Period. He is currently the chairman of Shanghai Juneyao (Group) Co., Ltd., the chairman of Juneyao Airlines Co., Ltd., the chairman of Shanghai Aijian Group Co., Ltd., the chairman of Jiangsu Wuxi Commercial Building Group Co., Ltd., the chairman of Shanghai World Foreign Language Primary and Middle Schools, a vice president of China Glory Society, a vice chairman (vice president) of Shanghai Federation of Industry and Commerce (General Chamber of Commerce), and the president of Shanghai Zhejiang Chamber of Commerce. Mr. Wang served as a manager, deputy general manager and general manager of Wenzhou Tianlong Chartered Aircraft Industry Co., Ltd., the general manager of Juneyao Group Aviation Services Co., Ltd., a vice president, vice chairman and president of Shanghai Juneyao (Group) Co., Ltd., a member of the 11th and 13th National Committee of the CPPCC and a representative of the 12th National People’s Congress. In October 2018, Mr. Wang was selected into the List of 100 Outstanding Private Entrepreneurs in the 40 Years of Reform and Opening Up by the United Front Work Department of the Central Government and the All-China Federation of Industry and Commerce. From December 2019 to December 2020, he served as Director of the Company. Mr. Wang has a postgraduate degree and obtained a Master of Business Administration degree.

Mr. Lin Wanli, served as an independent Director of the Company during the Reporting Period. Mr. Lin is currently an external director of Central Enterprise. Mr. Lin served as a vice party secretary and secretary of the disciplinary committee of the Tunnel Bureau of Ministry of Railways from December 1995 to March 2001, the vice chairman and party secretary of China Railway Tunnel Group Co., Ltd. from April 2001 to December 2006, and a vice party secretary, secretary of the disciplinary committee and chairman of the labour union of China Northern Locomotive and Rolling Stock Industry (Group) Corporation from January 2007 to August 2013. He served as the president and party secretary of China Railway Materials Commercial Corporation and the chairman and party secretary of China Railway Materials Co., Ltd. from August 2013 to June 2015, a director and party secretary of China National Aviation Fuel Group Corporation from July 2015 to November 2016, and the chairman of China Aviation Oil (Singapore) Corporation Ltd. from August 2015 to February 2017. Since November 2016, he has served as an external director of Central Enterprise. Since February 2017, he has served as an external director of China National Agricultural Development Group Co., Ltd. Since January 2018, he has served as a non-executive director of China Construction Science & Technology Group Co., Ltd. From August 2018 to December 2020, he served as an independent Director of the Company. Mr. Lin graduated from the Economics Faculty of Shandong University and obtained an Executive Master of Business Administration degree from Tsinghua University. He is a researcher-level senior political work specialist and senior economist.

Mr. Yuan Jun, served as an employee representative Director and chairman of the labour union of the Company and an employee representative director and chairman of the labour union of CEA Holding during the Reporting Period. Mr. Yuan joined the civil aviation industry in 1997. From May 2007 to October 2011, Mr. Yuan was the deputy head and head of Work Department of Party Committee of the Company. From October 2011 to May 2016, he was the general manager of Human Resources Department of the Company. From July 2014 to March 2018, he served as the chief human resources officer of the Company. From June 2015 to September 2016, he concurrently served as the general manager of Ground Services Department and the vice party secretary of the Company. From September 2016 to October 2018, he served as the head of Human Resources Department of CEA Holding. He served as an employee representative director of CEA Holding from December 2017 to December 2020, an employee representative Director of the Company from February 2018 to December 2020, the chairman of the labour union of the Company from April 2018 to May 2020 and the chairman of the labour union of CEA Holding from May 2018 to May 2020. Mr. Yuan holds an Executive Master of Business Administration degree from Fudan University and a senior political work specialist title.

Mr. Gao Feng, served as an employee representative Supervisor of the Company during the Reporting Period. Mr. Gao joined the civil aviation industry in 1984 and worked in China General Aviation Corporation. He served as a vice party secretary, secretary of the disciplinary committee and chairman of the labour union of the Shanxi Branch of the Company. He served as the party secretary of the Shanxi Branch of the Company from July 2009 to January 2014 and the party secretary, vice president and executive vice president of China United Airlines Co., Ltd. from January 2014 to October 2015. He served as the executive vice chairman of the labour union of the Company from October 2015 to November 2019, the director of the labour union office of the Company from June 2016 to November 2018, an employee representative Supervisor of the Company from August 2018 to December 2020 and the vice chairman of the labor union of CEA Holding from November 2018 to November 2019. He has been a member of party committee and deputy chief commander of the construction and operation command department of CEA Holding (CEA Corporation) in Beijing Daxing International Airport since November 2019. Mr. Gao graduated from the Central Party School of the Communist Party of China majoring in economic management, and obtained an Executive Master of Business Administration degree from Fudan University. He obtained a senior political work specialist title.

 

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Mr. Wu Yongliang, served as a vice president, the chief financial officer and a party member of the Company and a vice president, the chief accountant and a party member of CEA Holding during the Reporting Period. Mr. Wu joined the civil aviation industry in 1984 and served as deputy head and subsequently head of the Finance Department of the Company, head of Planning and Finance Department of the Company and head of the Finance Department of CEA Holding. From April 2001 to March 2009, he served as deputy chief accountant and head of the Finance Department of CEA Holding. From March 2009 to August 2020, he served as the chief financial officer of the Company. He served as a vice president and party member of the Company from December 2011 to August 2020, a vice president and party member of CEA Holding from November 2017 to July 2020, and the chief accountant of CEA Holding from June 2018 to July 2020. Mr. Wu graduated from the Faculty of Economic Management of Civil Aviation University of China, majoring in planning and finance. He also graduated from Fudan University, majoring in business administration. Mr. Wu holds an MBA degree and is a certified accountant.

B. Compensation

The aggregate amount of cash compensation paid by us to our directors, supervisors and the senior management during 2020 for services performed as directors, supervisors and officers or employees of our Company was approximately RMB4.9 million. In addition, directors and supervisors who are also officers or employees of our Company receive certain other in-kind benefits which are provided to all of our employees.

Details of the emoluments paid to our directors, supervisors and senior management for the year 2020 are as follows:

 

     Total  
Name and Principal Position    RMB’000  

Directors

  

Liu Shaoyong*

     —    

Li Yangmin*

     —    

Tang Bing*

     —    

Independent Non-executive Directors

  

Shao Ruiqing

     200  

Cai Hongping

     200  

Dong Xuebo

     60  

Employee Representative Director

  

Jiang Jiang

     2,361.1  

Supervisors

  

Guo Lijun

     —    

Fang Zhaoya*

     —    

Zhou Huaxin

     46.6  

Senior Management

  

Xi Sheng*

     —    

Zhou Qimin*

     —    

Feng Dehua*

     —    

Cheng Guowei*

     —    

Liu Tiexiang*

     —    

Wang Jian

     1,465.9  

Retired Director, Supervisor and Senior Management

  

Wang Junjin*

     —    

Lin Wanli

     —    

Yuan Jun*

     —    

Gao Feng

     559.5  

Wu Yongliang*

     —    

Total

     4,893.1  

 

*

These directors and supervisors of our Company received emoluments from CEA Holding, our parent company, part of which were in respect of their services to our Company and our subsidiaries. No apportionment has been made, as it is impracticable to apportion this amount between their services to us and their services to CEA Holding.

During the year ended December 31, 2020, no directors or supervisors of the Company waived their compensation.

C. Board Practices

All of our directors and supervisors serve a term of three years or until such later date as their successors are elected or appointed. Directors and supervisors may serve consecutive terms. One of the supervisors is employee representative supervisor appointed by our employees, and the rest are appointed by the shareholders. The following table sets forth the terms and the expiration of the terms of the directors, executive officers and supervisors of the Company who have held their positions during the period from January 1, 2020 to April 28, 2021.

 

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Name

  

Position

  

Held Position Since

  

Expiration of Term

Liu Shaoyong   

Chairman of the Board of Directors

  

December 31, 2019

   December 31, 2022
Li Yangmin   

Vice Chairman

President

  

December 31, 2019

December 31, 2019

  

December 31, 2022

December 31, 2022

Tang Bing   

Director

  

December 31, 2019

   December 31, 2022
Shao Ruiqing   

Independent Non-executive Director

  

December 31, 2019

   December 31, 2022
Cai Hongping   

Independent Non-executive Director

  

December 31, 2019

   December 31, 2022
Dong Xuebo   

Independent Non-executive Director

  

December 31, 2019

   December 31, 2022
Jiang Jiang   

Employee Representative Director

  

December 28, 2020

   December 31, 2022
  

Vice President

  

December 31, 2019

   January 18, 2021
Guo Lijun   

Chairman of the Supervisory Committee

  

March 29, 2021

   December 31, 2022
Fang Zhaoya   

Supervisor

  

December 31, 2019

   December 31, 2022
Zhou Huaxin   

Employee Representative Supervisor

  

December 10, 2020

   December 31, 2022
Xi Sheng   

Chairman of the Supervisory Committee

  

December 31, 2019

   January 18, 2021
  

Vice President

  

January 18, 2021

   December 31, 2022
Zhou Qimin   

Chief Financial Officer

  

August 28, 2020

   December 31, 2022
  

Vice President

  

January 18, 2021

   December 31, 2022
Feng Dehua   

Vice President

  

December 31, 2019

   December 31, 2022
Cheng Guowei   

Vice President

  

January 15, 2020

   December 31, 2022
Liu Tiexiang   

Vice President

  

April 29, 2020

   December 31, 2022
Wang Jian   

Board Secretary

  

December 31, 2019

   December 31, 2022

None of our directors, supervisors or members of our senior management has entered into any agreement or reached any understanding with us requiring our Company to pay any benefits as a result of termination of their services.

Audit and Risk Management Committee

Our Board of Directors established the audit committee in August 2000 in accordance with the listing rules of the HKEX. Currently, the Audit and Risk Management Committee comprised three members, namely Mr. Shao Ruiqing, as chairman of the committee, Mr. Cai Hongping and Mr. Dong Xuebo, all of which are independent non-executive directors, and satisfy the requirements of Rule 10A-3 of the Exchange Act and NYSE Rule 303A.06 relating to audit committees, including the requirements relating to independence of the audit committee members.

The Audit and Risk Management Committee is authorized to, among other things, examine our internal control, internal audit and risk management systems, review auditing procedures and financial reports with our auditors, evaluate the overall risk management and corporate governance of our Company and prepare relevant recommendations to our Board of Directors. Subject to the approval of the shareholders’ meeting, the Audit and Risk Management Committee of our Company is also directly responsible for the appointment, compensation, retention and oversight of our external auditors, including resolving disagreements between management and the auditor regarding financial reporting. The external auditors report directly to the Audit and Risk Management Committee. The Audit and Risk Management Committee holds at least three meetings each year. The Audit and Risk Management Committee has established procedures for the receipt, retention and treatment of complaints received by our Company regarding accounting, internal controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit and Risk Management Committee has the authority to engage independent counsel and other advisors, as it determines necessary, to carry out its duties. Our Company provides appropriate funding, as determined by the Audit and Risk Management Committee, for payment of compensation to the external auditors, advisors employed by the audit committee, if any, and ordinary administrative expenses of the audit committee that are necessary or appropriate in carrying out its duties. The Audit and Risk Management Committee held 10 meetings in 2020.

Nominations and Remuneration Committee

Currently, the Nominations and Remuneration Committee comprised three members, namely Mr. Liu Shaoyong, the Chairman, Mr. Cai Hongping and Mr. Dong Xuebo. Mr. Cai Hongping and Mr. Dong Xuebo are independent non-executive director. When considering and approving nomination related matters, the Nominations and Remuneration Committee will be chaired by Mr. Liu Shaoyong; when considering and approving remuneration related matters, the Nominations and Remuneration Committee will be chaired by Mr. Cai Hongping.

The Nominations and Remuneration Committee is authorized to make recommendations to our Board of Directors regarding its size and composition based on the relevant provisions of the PRC Company Law and in the light of specific circumstances such as the characteristics of the Company’s equity structure, determine standards and procedures for the nomination of directors and senior management of the Company, examine the remuneration policies of directors and senior management of the Company, review the performance of our directors and senior management as well as determine their annual compensation level. The Nominations and Remuneration Committee submits to our Board of Directors or shareholders’ meeting for approval compensation plans and oversee the implementation of approved compensation plans. The Nominations and Remuneration Committee may consult financial, legal or other outside professional firms in carrying out its duties. The Nominations and Remuneration Committee held 4 meetings in 2020.

 

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We follow our home country practice in relation to the composition of our Nominations and Remuneration Committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a remuneration committee composed entirely of independent directors.

Planning and Development Committee

Currently, the Planning and Development Committee comprised three members, namely Mr. Tang Bing, a director, Mr. Dong Xuebo and Mr. Cai Hongping, both of them are independent non-executive director. Mr. Tang Bing was appointed as the chairman of the Planning and Development Committee.

The Planning and Development Committee, a specialized committee under our Board of Directors, is responsible for studying, considering, and developing plans and making recommendations with regard to the long-term development plans and material investment decisions of the Company. The members of the committee also oversee the implementation of such plans. The Planning and Development Committee held 6 meetings in 2020.

Aviation Safety and Environment Committee

Currently, the Aviation Safety and Environment Committee comprised three members, namely Mr. Li Yangmin, a director, Mr. Shao Ruiqing, an independent non-executive director and Mr. Jiang Jiang, an employee representative director. Mr. Li Yangmin was appointed as the chairman of the committee.

The Aviation Safety and Environment Committee, a specialized committee under the Board of Directors, is responsible for consistent implementation of relevant laws or regulations regarding national aviation safety and environmental protection, examining and overseeing the aviation safety management of the Company, studying, considering and making recommendations with regard to aviation safety duty plans and significant issues resulting from related safety duties as well as implementing such safety duty plans. In addition, the Aviation Safety and Environment Committee performs studies, and makes recommendations on significant environmental protection issues, including carbon emissions on our domestic and international aviation routes and carbon emission programs, and overseeing their implementation. The Aviation Safety and Environment Committee held 2 meetings in 2020.

D. Employees

Our employees are members of a labor association, which represents employees with respect to labor disputes and certain other employee matters. We believe that we maintain good relations with our employees and with their labor association.

The table below sets forth the number of our employees as of December 31, 2018, 2019 and 2020, respectively:

 

     As of December 31,  
     2018      2019      2020  

Pilots

     7,634        8,284        8,837  

Flight attendants and other aircrew staff

     19,909        21,673        21,149  

Maintenance personnel

     12,262        12,960        13,258  

Sales and marketing

     3,978        4,009        4,040  

Operation control

     1,780        1,877        1,893  

Information technology

     1,025        1,116        1,168  

Management

     3,605        3,650        3,677  

Ground Services and others

     26,812        27,567        27,135  

Total

     77,005        81,136        81,157  

In 2020, we continued to provide large-scale training with different emphasis on different personnel and construct our online study platform to integrate online and offline training resources. By setting up our online study platform, we integrated the online and offline training resources and enhanced the effects of training and studying. We focused on different professional trainings, concentrated on the development of talent for the key positions and set up clear development and training plans for the targeted personnel. For example, in 2020, we launched training programs for cabin crew, ground services personnel and maintenance personnel in relation to the new model of aircraft we introduced. We also prepared specific training plan for backup talents to enhance our talent reserve. Due to the impact of the COVID-19 pandemic, we adjusted our training program in a timely manner, added online training methods, and provided various types of training for the the middle and high level management personnel.

See Note 8 to the consolidated financial statements for changes in our retirement benefits.

E. Share Ownership

See Item 6.A and Item 6.B above.

 

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In 2012, we implemented an H shares appreciation rights scheme, under which H shares appreciation rights were granted to the directors and senior management on November 30, 2012 at an exercise price of HK$2.67. The H share appreciation rights granted under this scheme are valid for a period of five years from the date of grant. The lock-up period of the share appreciation rights shall be the 24 months from the date of grant, during which no share appreciation right shall be exercised. Subject to the satisfaction of performance appraisal indicators, incentive recipients may exercise their share appreciation rights in equal installments within three years after the expiration of the lock-up period.

There was no granting or exercise of rights under the H shares appreciation rights of our Company during 2013. The first tranche of H shares appreciation rights, amounting to one third of the total H shares appreciation rights of our Company, was originally planned to be exercised on December 1, 2014. However, as our Company did not satisfy the exercising conditions in 2013, such tranche expired automatically.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table sets forth certain information regarding ownership of our capital stock as of December 31, 2020 by all persons who were known to us to be the beneficial owners of 5% or more of any class of our issued share capital:

 

Name of shareholder

   Class of shares      Number of shares held     Percentage in the relevant
class of Shares (%)
     Percentage in total
issued shares (%)
 

CEA Holding

     A Shares        5,072,922,927 (2)      45.28        30.97  
        457,317,073 (2)      4.08        2.79  
     H Shares        2,626,240,000 (3)      50.73        16.03  

CES Global

     H Shares        2,626,240,000 (3)      50.73        16.03  

HKSCC Nominees Limited

     H Shares        4,701,626,955       90.82        28.70  

Juneyao Group

     A Shares        311,831,909 (4)      2.78        1.90  
        808,441,233 (4)      7.22        4.94  
     H Shares        529,677,777 (5)      10.23        3.23  

Juneyao Airlines

     A Shares        219,400,137 (4)      1.96        1.34  
        589,041,096 (4)      5.26        3.60  
        311,831,909 (4)      2.78        1.90  
     H Shares        12,000,000 (5)      0.23        0.07  
        517,677,777 (5)      10.00        3.16  

Juneyao Hong Kong

     H Shares        517,677,777 (5)      10.00        3.16  

Shanghai Jidaohang

     A Shares        589,041,096 (4)      5.26        3.60  

Wang Junjin

     A Shares        1,120,273,142 (4)      10.00        6.84  
     H Shares        529,677,777 (5)      10.23        3.23  

Wang Han

     A Shares        1,120,273,142 (4)      10.00        6.84  
     H Shares        558,769,777 (5)      10.79        3.41  

Ye Jinqi

     A Shares        1,120,273,142 (4)      10.00        6.84  
     H Shares        529,677,777 (5)      10.23        3.23  

Notes:

 

(1)

Based on the information available to the directors (including such information as was available on the website of the HKEX) and so far as they are aware, as of December 31, 2020.

(2)

5,072,922,927 A Shares were held directly by CEA Holding; and 457,317,073 A Shares were held directly by CES Finance, which in turn was entirely held by CEA Holding. Therefore, CEA Holding is deemed to be interested in the 457,317,073 A Shares held directly by CES Finance.

(3)

CES Global directly held 2,626,240,000 H Shares through HKSCC Nominees Limited, and CEA Holding indirectly owned the entire interests of CES Global through CES Finance. Therefore, CEA Holding is deemed to be interested in the 2,626,240,000 H Shares held directly by CES Global.

(4)

311,831,909 A Shares were held directly by Juneyao Group. 219,400,137 A Shares were held directly by Juneyao Airlines. 589,041,096 A Shares were held directly by Shanghai Jidaohang. Mr. Wang Han and Mr. Wang Junjin were interested in 71.77% of shares of Juneyao Group. Juneyao Group is the controlling shareholder of Juneyao Airlines. Juneyao Airlines owned the entire equity interests of Shanghai Jidaohang. Ms. Ye Jinqi is the spouse of Mr. Wang Junjin. Therefore, Juneyao Group is deemed to be interested in 219,400,137 A Shares and 589,041,096 A Shares held by Juneyao Airlines and Shanghai Jidaohang, respectively. Juneyao Airlines is deemed to be interested in 589,041,096 A Shares held directly by Shanghai Jidaohang. Mr. Wang Han and Mr. Wang Junjin are deemed to be interested in 311,831,909 A Shares, 219,400,137 A Shares and 589,041,096 A Shares held directly by Juneyao Group, Juneyao Airlines and Shanghai Jidaohang, respectively. Ms. Ye Jinqi is deemed to be interested in 1,120,273,142 A Shares held indirectly by Mr. Wang Junjin.

On October 29, 2019, Juneyao Group and Juneyao Airlines signed a voting rights proxy agreement to delegate the voting rights of 311,831,909 A Shares held directly by Juneyao Group to Juneyao Airlines. Therefore, Juneyao Airlines is also deemed to be interested in the 311,831,909 A Shares held directly by Juneyao Group.

 

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(5)

Juneyao Airlines directly held 12,000,000 H Shares and Juneyao Hong Kong directly held 517,677,777 H Shares through HKSCC Nominees Limited. Mr. Wang Han and Mr. Wang Junjin were interested in 71.77% of shares of Juneyao Group. Juneyao Group is the controlling shareholder of Juneyao Airlines. Juneyao Airlines owned the entire equity interests of Juneyao Hong Kong. Ms. Ye Jinqi is the spouse of Mr. Wang Junjin. Therefore, Juneyao Group, Mr. Wang Han and Mr. Wang Junjin are deemed to be interested in 12,000,000 H Shares and 517,677,777 H Shares held directly by Juneyao Airlines and Juneyao Hong Kong. Juneyao Airlines is deemed to be interested in 517,677,777 H Shares held directly by Juneyao Hong Kong. Ms. Ye Jinqi is deemed to be interested in 558,769,777 H Shares held indirectly by Mr. Wang Junjin.

As of December 31, 2020, CEA Holding directly or indirectly held 49.79% of our issued and outstanding capital stock. Due to the completion of non-public issuance of H Shares and A Shares by us to Juneyao Airlines and Juneyao Group in 2019, the shareholding of Juneyao Airlines, Juneyao Group, Mr. Wang Junjin, Mr. Wang Han and Ms. Ye Jinqi in us increased in 2019, resulting in the dilution of the shareholding of CEA Holding in us. See “Item 4. Information on the Company – History and Development of the Company” for details of the non-public issuance of H Shares and A Shares. Neither CEA Holding nor HKSCC Nominees Limited has any voting rights different from those of other shareholders. We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.

As of December 31, 2020, there were 5,176,777,777 H Shares issued and outstanding. As of December 31, 2020 and April 15, 2021, there were 58 and 56 registered holders, respectively, of American Depositary Receipts evidencing 1,323,052 and 1,338,412 ADSs, respectively. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons.

Our Company is currently a subsidiary of CEA Holding who holds 49.79% of our issued and outstanding capital stock. CEA Holding itself is a wholly state-owned enterprise under the administrative control of the SASAC. CEA Holding’s shareholding in our Company is in the form of ordinary domestic shares, through which it, under the supervision of the SASAC, enjoys shareholders’ rights and benefits on behalf of the PRC government.

B. Related Party Transactions

Relationship with CEA Holding and Associated Companies

We enter into transactions from time to time with CEA Holding and its subsidiaries. For a description of such transactions, see Note 48 to the consolidated financial statements.

Related Business Transactions

As our Company and EA Group and its subsidiaries were a single group prior to the restructuring in 2002, certain arrangements among us have continued after the restructuring and the establishment of CEA Holding. Although we do not currently intend to enter into any equivalent contracts with third parties, each of these arrangements is non-exclusive.

Eastern Aviation Import and Export Co., Ltd. (“EAIEC”), a 55% owned subsidiary of CEA Holding

Import and Export Services (previously known as Import and Export Agency Services)

On August 30, 2016, we entered into an agreement relating to the renewal of the existing import and export agency agreement with EAIEC, pursuant to which EAIEC and its subsidiaries will from time to time provide us with a range of import and export services including: (i) agency services for the import and export of goods, including aircraft and related raw materials, accessories, machinery and equipment, together with related insurance and financial services, required in the daily airlines operations and civil aviation business of us; (ii) the provision of transportation services as required by us in the conduct of foreign trade; and (iii) provision of aircraft on-board supplies. The import and export services renewal agreement (previously known as import and export agency renewal agreement) is effective for a term of three years, from January 1, 2017 to December 31, 2019.

On August 30, 2019, we entered into an agreement relating to the renewal of the existing import and export services renewal agreement with EAIEC (the “Import and Export Services Agreement”), pursuant to which EAIEC and its subsidiaries will from time to time provide us with a range of import and export services in the conduct of foreign trade including: (i) provision of agency services for the import and export of goods in the conduct of foreign trade; (ii) provision of transportation management services in the conduct of foreign trade; and (iii) provision of aircraft on-board supplies procurement and other services. The Import and Export Services Agreement is effective for a term of three years, from January 1, 2020 and December 31, 2022.

For the year ended December 31, 2020, we paid handling charges of approximately RMB132 million to EAIEC. We currently have certain balances with EAIEC, which are trade in nature, interest-free and payable within normal credit terms. See Note 45(c) to the consolidated financial statements for more details.

 

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China Eastern Airlines Media Co. Ltd. (“CEA Media”), a 55% owned subsidiary of CEA Holding

Advertising Service Agreement

On August 30, 2016, we entered into an agreement relating to the renewal of the existing advertising services agreement with CEA Media on substantially the same terms, pursuant to which CEA Media and its subsidiaries will from time to time provide us with multi-media advertising services to promote our business and to organize promotional functions and campaigns to enhance our reputation in the civil aviation industry. The advertising services renewal agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

On August 30, 2019, we entered into an agreement relating to the renewal of the existing advertising services agreement with CEA Media (the “Advertising Services Renewal Agreement”), pursuant to which CEA Media and its subsidiaries will from time to time provide us with multi-media advertising services to promote our business and to organize promotional functions and campaigns to enhance our reputation in the civil aviation industry. The Advertising Services Renewal Agreement is effective for a term of three years, from January 1, 2020 and December 31, 2022.

For the year ended December 31, 2020, we paid to Eastern Aviation Advertising approximately RMB26 million for advertising services.

Media Resources Agreement

On September 27, 2013, we entered into an agreement with CEA Media, pursuant to which we and certain of our subsidiaries agreed to transfer the exclusive rights to use certain media and advertising resources to CEA Media and certain of its subsidiaries for a period of 15 years (from January 1, 2014 to December 31, 2028). CEA Media is a subsidiary of and thus an associate of CEA Holding, which in turn is a controlling shareholder of the Company.

For the year ended December 31, 2020, Eastern Aviation Advertising paid approximately RMB14 million in media royalty fees.

China Eastern Air Catering Investment Co., Ltd. (“CEA Catering”), a 55% owned subsidiary of CEA Holding with the remaining by our Company

Catering Service Agreements

On August 30, 2016, we entered into an agreement relating to the renewal of the existing catering services agreement with CEA Catering, pursuant to which CEA Catering and its subsidiaries (each an “Eastern Air Catering Entity” and collectively the “Eastern Air Catering Entities”) will from time to time provide us with catering services (including the supply of meals and beverages, cutlery and tableware) and related storage and complementary services required in the day-to-day airline and ground operation of us. The Eastern Air Catering Entities provide their services in accordance with the specifications and schedules as from time to time specified by the relevant member(s) of us to accommodate the operational needs of us.

On August 30, 2019, we entered into an agreement relating to the renewal of the existing catering services agreement with CEA Catering (the “Catering Services and Related Services Agreement”), pursuant to which CEA Catering and its subsidiaries (each an “Eastern Air Catering Entity” and collectively the “Eastern Air Catering Entities”) will from time to time provide us with food, beverages, related tableware and the storage, recycling and other related services for food and beverages required for air transport and ground services. In addition, the Eastern Air Catering Entities (as the lessee) will lease lands and buildings owned by us (as the lessor) and will construct buildings and structures on lands leased from us, offsetting rent with construction costs. The Catering Services and Related Services Agreement is effective for a term of three years, from January 1, 2020 and December 31, 2022.

On August 28, 2020, we entered into an agreement relating to the daily connected transaction with CEA Catering (the “the Catering and Aircraft On-board Supplies Support Agreement”), pursuant to which we shall engage Eastern Air Catering Entities for the centralized procurement and the support and maintenance of operation of all of the catering, aircraft on-board supplies support and related services. In addition, Eastern Air Catering Entities shall provide property leasing services in the mode of “offsetting rent with construction costs” to us. The Catering and Aircraft On-board Supplies Support Agreement (the renewed catering service and related services agreement) is effective for a term of three years, from January 1, 2021 and December 31, 2023.

In 2020, we paid RMB812 million to CEA Catering for its provision of food, beverages, related tableware and the storage, recycling and other related services, and received RMB15 million from CEA Catering for our provison of property leasing services to CEA Catering.

Eastern Air Group Finance Co., Ltd., (“Eastern Finance”), a 53.75% owned subsidiary of CEA Holding

On August 30, 2016, we entered into an agreement relating to the renewal of the existing financial services agreement with Eastern Finance and CES Finance, on substantially the same terms, pursuant to which Eastern Finance and its subsidiaries (each an “Eastern Air Finance Entity” and collectively the “Eastern Air Finance Entities”) and CES Finance and its subsidiaries (each a “CES Finance Entity” and collectively the “CES Finance Entities”) agreed from time to time provide us with a range of financial services including: (i) deposit services by the Eastern Air Finance Entities; (ii) loan and financing services by the Eastern Air Finance Entities; and (iii) other financial services, such as: (a) the provision of services such as trust loans, financial guarantees and credit references by the Eastern Air Finance Entities; and (b) the provision of services such as broker services for future products (e.g. crude oil, foreign exchange and national debt) by the CES Finance Entities (the scope of “other financial services” is not limited and different services may be provided to us as and when they are needed). The financial services renewal agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

 

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On August 30, 2019, we entered into an agreement relating to the renewal of the existing financial services agreement with Eastern Finance (the “Financial Services Agreement”), pursuant to which Eastern Finance and its subsidiaries agreed from time to time provide us with a range of financial services including: with a range of financial services including: (i) deposit services; (ii) loan services; and (iii) other financial services. The Financial Services Agreement is effective for a term of three years, from January 1, 2020 to December 31, 2022.

As of December 31, 2020, we had deposits amounting to RMB5,474 million placed with Eastern Finance, which paid interest to us at 0.35%per annum.

CEA Development Co. (“CEA Development”), a wholly-owned subsidiary of CEA Holding

On August 30, 2016, we entered into the complementary services renewal agreement (previously known as the existing maintenance and repair services agreement) with CEA Development, pursuant to which CEA Development and its subsidiaries (each a “CEA Development Entity” and collectively the “CEA Development Entities”) will from time to time provide us with a range of services including: (i) supply of equipment and materials and provision of maintenance and repair services to our automobiles and equipment; (ii) provision of property management services; (iii) provision of hotel accommodation services; and (iv) other complementary aviation services. The complementary services renewal agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

On August 30, 2019, the Company entered into an agreement relating to the renewal of the existing complementary services agreement with CEA Development (the “Complementary Services Agreement”), pursuant to which CEA Development Entities will from time to time provide us with a range of services. According to the Complementary Services Agreement, CEA Development Entities will provide us with special vehicles and equipment leasing, supply and maintenance services, property management services, hotel services, ground transportation services and other aviation supporting services.

For the year ended December 31, 2020, production and maintenance services fees paid to CEA Development Entity amounted to approximately RMB439 million.

Eastern Logistics, an indirectly owned subsidiary of CEA Holding

Disposal of the entire equity interest in Eastern Air Logistics

On November 29, 2016, we entered into a disposal agreement with Eastern Airlines Industry Investment, pursuant to which, we have conditionally agreed to sell, and Eastern Airlines Industry Investment has conditionally agreed to purchase, our entire equity interest in Eastern Logistics at a consideration of RMB2,432,544,211.50, determined with reference to the relevant valuation report. Upon completion of the disposal on February 8, 2017, Eastern Logistics ceased to be our subsidiary.

Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics

As Eastern Logistics ceased to be our subsidiary, each member of the Eastern Logistics Group became a connected person of us. On November 29, 2016, we entered into the Freight Logistics Daily Connected Transactions Framework Agreement with Eastern Logistics. We will provide the following services to the Eastern Logistics Group, required for the daily operation of its freight logistics business: (i) aircraft maintenance and its ancillary support services; (ii) information technology support services; (iii) cleaning services; (iv) training services; and (v) other daily support services. The Eastern Logistics Group will provide us the following services required for our daily business operation: (i) apron transfer services, cargo terminal operation services and security inspection services; and (ii) other daily support services. The Freight Logistics Daily Connected Transactions Framework Agreement will be effective for a term of three years, commencing from the date on which the entire equity interest in Eastern Logistics was transferred from us to Eastern Airlines Industry Investment pursuant to the disposal agreement, and ending on December 31, 2019.

On August 30, 2019, we entered into an agreement relating to the renewal of the existing freight logistics daily connected transactions framework agreement with Eastern Logistics on substantially the same terms (the “Freight Logistics Daily Connected Transactions Framework Agreement”), pursuant to which we will provide the freight logistics business support services, including (i) aircraft maintenance and its ancillary support services; (ii) cargo transport maintenance and its ancillary support services; (iii) information technology support services; (iv) cleaning services; (v) training services; and (vi) other daily support services, to Eastern Logistics required for the daily operation of its freight logistics business, and the Eastern Logistics will provide the cargo terminal business support services (as defined below), including (i) apron transfer services, cargo terminal operation services and security inspection services; and (ii) other daily support services, to us required for our daily business operation. The Freight Logistics Daily Connected Transactions Framework Agreement is effective for a term of three years, from January 1, 2020 to December 31, 2022.

For the year ended December 31, 2020, the amount payable by Eastern Logistics to us for the freight logistics support services amounted to approximately RMB185 million and the amount payable by us to Eastern Logistics for the cargo terminal business support services amounted to approximately RMB286 million.

Exclusive Operation Agreement for Passenger Aircraft Cargo Business

On January 1, 2017, to avoid the competition between the bellyhold space business operated by us and the all-cargo aircraft freight business operated by China Cargo Airlines, the subsidiary of Eastern Logistics, after the completion of equity transfer in Eastern Logistics, we entered into the Bellyhold Space Management Agreement with China Cargo Airlines to entrust China Cargo Airlines for the operation of the bellyhold space business for a term of three years, which commenced on January 1, 2017. Pursuant to the Bellyhold Space Management Agreement, in respect of the entrusted management of bellyhold space business, we will pay management fee to China Cargo Airlines according to industry practice, including handling charges for the entrusted management and incentives for achieving specified sales targets. The Bellyhold Space Management Agreement is effective for a term of three years commencing January 1, 2017 until December 31, 2019.

 

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The Bellyhold Space Management Agreement has been superseded by the contractual operation agreement dated March 1, 2018 entered into between the Company and China Cargo Airlines from March 31, 2018.

On September 29, 2020, we entered into the adjusted “passenger aircraft bellyhold space contractual operation proposal” with China Cargo Airlines, pursuant to which we clarified the coverage of the transaction, and the pricing method. In addition, the adjustment provided the cap amount of the Exclusive Operation Agreement (the adjusted “passenger aircraft bellyhold space contractual operation proposal”) for each of the three years ending December 31, 2020, 2021 and 2022. The Exclusive Operation Agreement is effective from January 1, 2020 to December 31, 2032.

For the year ended December 31, 2020 the actual amount paid by the China Cargo Airlines amounted to RMB4,895 million under the Exclusive Operation Agreement.

Shanghai Eastern Airlines Investment Co., Limited (“Eastern Investment”), a wholly-owned subsidiary of CEA Holding

Land Use Rights Transfer Agreement and the Buildings Compensation Agreement

On September 29, 2017, we entered into the land use rights transfer agreement and the buildings compensation agreement with Eastern Investment in Shanghai. Pursuant to the land use rights transfer agreement and the buildings compensation agreement, (i) we agreed to transfer to Eastern Investment the land use rights in respect of the target land together with the buildings thereon at the eastern district of Terminal One of the Shanghai Hongqiao International Airport; and (ii) Eastern Investment agreed to compensate us for the transfer of the buildings, at total consideration of approximately RMB808 million.

Property Leases

On August 30, 2016, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding. Pursuant to the property leasing renewal agreement, we will lease from CEA Holding and its subsidiaries the following properties, for use in our daily airlines and other business operations:

 

  (a)

altogether 17 land properties owned by CEA Holding in Lanzhou, Gansu, covering an aggregate site area of approximately 234,989 square meters together with a total of 81 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 54,290 square meters;

 

  (b)

altogether three land properties owned by CEA Holding in Kunming, Yunnan, covering an aggregate site area of 44,835 square meters together with a total of 24 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 67,992 square meters;

 

  (c)

one building property, construction, structures and other ancillary facilities owned by CEA Holding in Shijiazhuang, occupying an aggregate floor area of approximately 8,853 square meters;

 

  (d)

a total of 67 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Taiyuan, occupying an aggregate floor area of approximately 45,068 square meters;

 

  (e)

a total of 7 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Shanghai, occupying an aggregate floor area of approximately 13,195 square meters;

 

  (f)

altogether 16 land properties owned by China Eastern Air Northwest Company (“CEA Northwest”), covering an aggregate site area of approximately 393,929 square meters together with a total of 115 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 88,440 square meters;

 

  (g)

a total of altogether 33 guest rooms in Eastern Hotel owned by CEA Holding, occupying an aggregate floor area of approximately 1,500 square meters located in Shanghai; and

 

  (h)

other land and property facilities owned by CEA Holding may be leased to us from time to time due to our business and operational needs.

In addition to the above and on terms and conditions to be further agreed, we leased some of the properties legally owned or leased by us to subsidiaries of CEA Holding as needed by the subsidiaries of CEA Holding. The property leasing renewal agreement was effective for a term of three years from January 1, 2017 to December 31, 2019.

 

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On August 30, 2019, we entered into an agreement relating to the renewal of the existing property leasing agreement with CEA Holding and Eastern Investment (the “Property Leasing and Construction and Management Agency Agreement”). Pursuant to the Property Leasing and Construction and Management Agency Agreement, CEA Holding and its subsidiaries (including Eastern Investment) will lease to us relevant properties. In the meantime, Eastern Investment will also provide the construction and management agency services to us in relation to the basic construction projects, organize the implementation of the construction management work and provide the projects that meet various standards to us pursuant to the agreement. The scope of specific construction and management agency services is determined according to the agreement of the specific agreement signed by both parties.

Pursuant to the Property Leasing and Construction and Management Agency Agreement, we will lease from CEA Holding and its subsidiaries (excluding Eastern Investment) the following properties, for use by us in our daily airlines and other business operations:

 

  (a)

altogether 20 land properties owned by CEA Holding in Lanzhou, Gansu, covering an aggregate site area of approximately 234,989 square meters together with a total of 77 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 54,290 square meters;

 

  (b)

altogether three land properties owned by CEA Holding in Kunming, Yunnan, covering an aggregate site area of 44,835 square meters together with a total of 24 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 67,992 square meters;

 

  (c)

one building property, construction, structures and other ancillary facilities owned by CEA Holding in Shijiazhuang, occupying an aggregate floor area of approximately 8,853 square meters;

 

  (d)

a total of 77 building properties, construction, structures and other ancillary facilities owned by CEA Holding in Taiyuan, occupying an aggregate floor area of approximately 45,068 square meters;

 

  (e)

a total of seven building properties, construction, structures and other ancillary facilities owned by CEA Holding in Shanghai, occupying an aggregate floor area of approximately 13,195 square meters;

 

  (f)

altogether 15 land properties owned by CEA Northwest, covering an aggregate site area of approximately 335,741 square meters together with a total of 106 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 92,935 square meters; and

 

  (g)

other land and property facilities owned by CEA Holding may be leased to us from time to time due to our business and operational needs.

Pursuant to the Property Leasing and Construction and Management Agency Agreement, we will lease from Eastern Investment the following properties, for use by us in its daily airlines and other business operations:

 

  (a)

a total of 78 building properties, construction, structures and other ancillary facilities owned by Eastern Investment in Chengdu, occupying an aggregate floor area of approximately 25,992 square meters;

 

  (b)

a total of 17 building properties, construction, structures and other ancillary facilities owned by Eastern Investment in Beijing, occupying an aggregate floor area of approximately 35,730 square meters;

 

  (c)

a total of 26 building properties, construction, structures and other ancillary facilities owned by Eastern Investment in Lanzhou, occupying an aggregate floor area of approximately 29,274 square meters;

 

  (d)

altogether five land properties owned by Eastern Investment in Shanghai Hongqiao East District, covering an aggregate site area of approximately 333,369 square meters together with a total of 60 building properties, construction, structures and other ancillary facilities occupying an aggregate floor area of approximately 120,053 square meters;

 

  (e)

one building property, construction, structures and other ancillary facilities owned by Eastern Investment in Hangzhou, occupying an aggregate floor area of approximately 486 square meters; and

 

  (f)

other land and property facilities owned by Eastern Investment may be leased to us from time to time due to our business and operational needs.

The Property Leasing and Construction and Management Agency Agreement is effective for a term of three years commencing from January 1, 2020 to December 31, 2022.

For the year ended December 31, 2020, we paid a rental fee of RMB134 million under the property leasing renewal agreement.

Amendments to the Non-Competition Undertaking with CEA Holding

On December 22, 2017, we and CEA Holding entered into the supplemental agreement II to the reorganization and division agreement to amend the non-competition undertaking of CEA Holding as set out in article 3 of the supplemental agreement I to the reorganization and division agreement entered into by both parties in 1996.

 

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Pursuant to article 3 of the supplemental agreement I, CEA Holding has undertaken to us that, so long as we are listed in the PRC, Hong Kong or New York, if CEA Holding holds more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in any place within or outside the PRC or in any way (including but not limited to carrying on through sole proprietorship, forming partnerships or joint ventures with others and holding shares or interests in other companies or enterprises, except that the shares held by CEA Holdings do not exceed 10% of our shares or enterprise as listed on a stock exchange) conduct any business or activities that is or may be in direct or indirect competition with our business.

Pursuant to the amendments, CEA Holding undertakes to us that so long as we are listed in the PRC, Hong Kong or New York, if CEA Holding holds more than 35% of the issued shares of us or is deemed to be our controlling shareholder pursuant to the listing rules of relevant stock exchange(s) or relevant laws and regulations, CEA Holding shall not, in any place within or outside the PRC or in any way, conduct any business or activities that is or may be in direct or indirect competition with our business, with an exception that CEA Holding will be allowed to conduct equity investment in any companies or enterprises that is or may be in direct or indirect competition with the principal business of the Company (the “Competing Enterprise(s)”), provided that CEA Holding and its controlled subsidiary(ies) (other than us) will not contravene any applicable laws and regulations as well as regulatory rules, control or be deemed to control such Competing Enterprises by the listing rules of relevant stock exchange(s) or relevant laws and regulations after the investment, and subject to certain conditions.

Guarantee by CEA Holding

As of December 31, 2018, 2019 and 2020, bonds issued by us in an aggregate amount of RMB7.8 billion were guaranteed by CEA

Holding.

See Note 45(d) to the consolidated financial statements.

Guarantee by the Company

To Certain Subsidiaries

On January 17, 2017, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the Board resolution to December 31, 2017, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business Airlines Service Co., Limited, Eastern Technology, and their respective wholly-owned subsidiaries. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.

On December 22, 2017, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the Board resolution to December 31, 2018, guarantee in the total amount of up to RMB1,000 million to China United Airlines, Shanghai Eastern Flight Training Co., Limited, Eastern Business Airlines Service Co., Limited, Eastern Technology, and their respective wholly-owned subsidiaries, and that Shanghai Airlines Tours International (Group) Co., Limited, a wholly-owned subsidiary of us, shall provide guarantee in the total amount of up to RMB10 million to Shanghai Dongmei Air Travel Co., Ltd. The period of guarantee shall be the same as the period of subject obligations of the respective guaranteed parties and shall not exceed 10 years.

On January 19, 2018, with an aim to carry out the work of changing aircraft leasing from overseas operating lease to domestic operating lease for not more than 67 aircraft, the Board of Directors agreed us to invest and establish not more than 67 subsidiaries in Dongjiang Free Trade Port Zone of Tianjin with the aggregate guarantee amount not exceeding RMB9.8 billion. The term of each guarantee will not exceed 15 years commencing from the actual date when we provide guarantee to each subsidiary. The guarantee was considered and approved at the general meeting of the Company held on February 8, 2018.

On January 18, 2019, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the resolution to December 31, 2019, guarantee in the total amount of up to RMB1 billion to China United Airlines, Shanghai Eastern Flight Training Co., Ltd., Eastern Business Airlines Service Co., Ltd., Eastern Technology, and their respective wholly-owned subsidiaries. Shanghai Airlines Tours (our then wholly-owned subsidiary) shall provide guarantee in the total amount of RMB10 million to Shanghai Dongmei Air Travel Co., Ltd., the period of which shall be the same as the period of the subject obligations of the respective guaranteed parties and shall not exceed 10 years.

On December 31, 2019, the Board of Directors considered and approved that we shall provide, within the period from the effective date of the resolution to December 31, 2020, guarantee in the total amount of up to RMB1 billion to our three wholly-owned subsidiaries, namely China United Airlines, Shanghai Eastern Flight Training Co., Ltd., and Eastern Technology, or their respective wholly-owned subsidiaries. The period of guarantee shall be the same as the period of the subject obligations of the respective guaranteed parties and shall not exceed 10 years.

A further guarantee was considered and approved at the 2021 first regular meeting of the Board of Directors held on January 26, 2021, which passed the resolution to provide guarantees to certain wholly-owned subsidiaries and agreed us to offer three wholly owned subsidiries, namely, Shanghai Eastern Flight Training Co., Ltd., China Eastern Aviation Technology Co., Ltd. and One Two Three Airlines Co., Ltd. or their wholly-owned subsidiaries with the aggregate guarantee amount not exceeding RMB1 billion. The term of the guarantee will not exceed 10 years and shall be consistent with the term of the principal debt of the gurantee.

 

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Agreements in relation to Aircraft Finance Lease and Aircraft Operating Lease with CES Leasing

Master Lease Agreement

On May 5, 2015, we entered into a master lease agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to 23 aircraft in accordance with the terms and conditions of the master lease agreement and the relevant implementation agreements. CES Leasing is a non-wholly owned subsidiary of CEA Holding, which in turn is the controlling shareholder of the Company.

2016 Aircraft Finance Lease Framework Agreement

On April 28, 2016, we entered into the 2016 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to the leased aircraft, as and when we consider desirable, in our interests and the interests of the shareholders as a whole in accordance with the terms and conditions of the 2016 Aircraft Finance Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 2016 Aircraft Finance Lease Framework Agreement was effective for a term of one year commencing January 1, 2016.

2017–2019 Aircraft Finance Lease Framework Agreement

On April 28, 2016, we entered into the 2017–2019 Aircraft Finance Lease Framework Agreement with CES Leasing, pursuant to which CES Leasing agreed to provide finance leasing to us in relation to the Leased Aircraft, as and when we consider desirable, in our interests and the interests of the shareholders as a whole in accordance with the terms and conditions of the 2017–2019 Aircraft Finance Lease Framework Agreement and the relevant implementation agreements contemplated thereunder. The 2017–2019 Aircraft Finance Lease Framework Agreement is effective for a term of three years, from January 1, 2017 to December 31, 2019.

Novation Agreement and Aircraft Operating Lease Agreement

On July 9, 2015, we (as the purchaser) entered into the purchase agreement with Boeing Company (as the seller) regarding the acquisition of fifty brand new Boeing B737 series aircraft (the “Purchase Agreement”).

On August 10, 2017, we entered into a novation agreement with CES Leasing, pursuant to which, (i) we agreed to novate, from the date of the novation agreement, our rights (including the purchase right) and obligations in and under the Purchase Agreement in respect of the five Boeing Aircraft, which are expected to be delivered by the Boeing Company to us in 2017 pursuant to the Purchase Agreement (the “Five Boeing Aircraft”) at nil consideration; and (ii) CES Leasing agreed to, from the date of the novation agreement, assume all of the rights (including the purchaser right) and obligations in and under the Purchase Agreement in respect of the Five Boeing Aircraft at nil consideration. The parties entered into the novation agreement at nil consideration.

On August 10, 2017, we entered into the aircraft operating lease agreement with CES Leasing, pursuant to which, CES Leasing agreed to provide operating leasing to us in relation to the Five Boeing Aircraft. The aircraft operating lease agreement is effective for a term of 144 months for each aircraft from the date on which each of the Five Boeing Aircraft is delivered. Delivery date would fall on the period between August 2017 and December 2017.

2018-2019 Aircraft and Engines Operating Lease Framework Agreement

On December 22, 2017, we entered into the 2018-2019 aircraft and engines operating lease framework agreement with CES Leasing, pursuant to which CES Leasing agreed to provide operating leasing to us in relation to the aircraft and aircraft engines. Upon successful bidding of the tender of the aircraft and/or aircraft engines during the period between January 1, 2018 and December 31, 2019 by CES Leasing, the term of each of the lease agreement under the 2018-2019 aircraft and engines operating lease framework agreement shall be not more than 144 months for each leasing of the aircraft and aircraft engines by CES Leasing to us.

2020–2022 Aircraft Finance Lease Framework Agreement

On August 30, 2019, we entered into an agreement relating to the renewal of the 2017–2019 Aircraft Finance Lease Framework Agreement with CES Leasing on substantially the same terms, pursuant to which CES Leasing Group (as lessor(s)) agreed to provide finance lease to us (as lessee(s)) in respect of the aircraft (the “2020–2022 Aircraft Finance Lease Framework Agreement”) with reference to the transaction practices for years between the parties for aircraft finance lease. Pursuant to the 2020–2022 Aircraft Finance Lease Framework Agreement, for certain aircraft which we intend to purchase during the years from 2020 to 2022, if, as evaluated on requests for proposals, the finance plans proposed by CES Leasing are better than the plans proposed by other parties (including, but not limited to the overall financial cost quoted in the finance plans proposed by CES Leasing being more competitive than those under other plans), we agreed to select CES Leasing for relevant transactions.

2020–2022 Aircraft and Aircraft Engines Operating Lease Framework Agreement

On August 30, 2019, we entered into an agreement relating to the renewal of the 2018-2019 Aircraft and Aircraft Engines Operating Lease Framework Agreement with CES Leasing on substantially the same terms, pursuant to which CES Leasing Group (as lessor(s)) agreed to provide operating leasing to us (as lessee(s)) in respect of the aircraft and aircraft engines (the “2020–2022 Aircraft and Aircraft Engines Operating Lease Framework Agreement”) with reference to the transaction practices for years between parties for aircraft and engine operating leasing agreements. According to such agreement, if, as evaluated on requests for proposals, the operating lease plans proposed by CES Leasing are better than other plans, we agreed to select CES Leasing for relevant transactions.

 

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For the year ended December 31, 2020, the actual amount paid by us for aircraft lease services (including aircraft finance lease and aircraft operating lease services) was approximately RMB6,667 million.

Transactions with Air France-KLM

On July 27, 2017, a wholly-owned subsidiary of CEA Holding and Delta Air Lines entered into a conditional subscription agreement with Air France-KLM, respectively, to acquire 10% newly issued shares in the share capital of Air France-KLM after the completion of issuance of additional shares. We entered into a marketing agreement with Air France-KLM to further strengthen the business partnership on the basis of good business relationship between the two parties.

On October 3, 2017, the trading of the fixed issuance of additional 10% shares to CEA Holding by Air France-KLM was completed in the Euronext. CEA Holding appointed Tang Bing, our director and then vice president as the director of Air France-KLM. According to the relevant requirements of the Shanghai Stock Exchange, the daily businesses such as joint operation and service security between us and Air France-KLM and its controlled subsidiaries constituted a related party transaction of the Company under the Rules Governing the Listing of Stocks on the Shanghai Stock Exchange.

On December 22, 2017, the Board of Directors considered and approved the relevant resolution regarding the 2017-2019 daily related party transactions between Air France-KLM and us, pursuant to which, we will provide aircraft aviation transportation cooperation and support services to Air France-KLM and Air France-KLM will provide aircraft aviation transportation cooperation and support services to us. The Board of Directors also approved the 2017-2019 annual caps for the Air France-KLM aircraft aviation transportation cooperation and support services.

On August 10, 2018, a wholly-owned subsidiary of us entered into the aeronautical materials and components maintenance and spare parts supply service agreement and components lease service agreement with the wholly-owned subsidiary of Air France-KLM, KLM Royal Dutch Airlines, pursuant to which, KLM Royal Dutch Airlines will lease and maintain aeronautical material and spare parts for our 15 B787 airplanes to us for 15 years. The Board of Directors considered and approved the relevant transactions.

On October 30, 2018, a wholly-owned subsidiary of us entered into the aeronautical materials and components maintenance and spare parts supply service agreement and components lease service agreement with the wholly-owned subsidiary of Air France-KLM, Societe Air France, pursuant to which, Societe Air France will lease and maintain aeronautical material and spare parts for our 20 A350 airplanes to us for 15 years. The Board of Directors considered and approved the relevant transactions.

On August 30, 2019, the Board of Directors considered and approved the relevant resolution regarding the 2020-2022 daily related party transactions between Air France-KLM and us. The Board of Directors also approved the 2020-2022 annual caps for the Air France-KLM aircraft aviation transportation cooperation and support services.

For the year ended December 31, 2020, the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support services received by us was approximately RMB105 million and the actual amount of the Air France-KLM aircraft aviation transportation cooperation and support services paid by us was approximately RMB221 million. The actual amount for the aeronautical materials, components and spare parts supply, leasing and maintenance services paid by us to Air France-KLM was approximately RMB10 million.

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

Financial Statements

Please read “Item 18. Financial Statements” for information regarding our audited consolidated financial statements and other financial information.

Legal Proceedings

We are involved in routine litigation and other proceedings in the ordinary course of our business. We do not believe that any of these proceedings are likely to be material to our business operations, financial condition or results of operations.

 

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Dividends and Dividend Policy

On March 29, 2018, the Board of Directors considered and approved the 2017 annual profit distribution proposal. It was recommended by the Board of Directors that the 2017 annual distribution be approximately RMB740.3 million in cash. Based on the total share capital of 14,467,585,682 shares of the Company, the cash distribution per share would be RMB0.051 (before tax) in cash which will be distributed to holders of A shares of the Company in RMB and to holders of H shares of the Company in HKD.

On March 29, 2019, the Board of Directors considered and approved the 2018 annual profit distribution proposal. According to the relevant requirements of the “Measures for the Administration of Securities Issuance and Underwriting” of the CSRC, “for issue securities by a listed company, in the event that any profit distribution proposal or proposal of conversion of the reserve into the share capital has not been submitted to its general meeting for voting or has been approved by the general meeting but has not yet been implemented, the issuance of securities shall proceed after such proposal has been implemented.” As the proposed non-public issuance of our A shares was under review by the CSRC and the project was strategically important to us, in order to guarantee the smooth progress of the proposed nonpublic issuance project, we intended not to proceed with cash dividend distribution or conversion of capital reserve into share capital for the year 2018, after comprehensively taking into account of our long-term development and the interests of all of our shareholders. The retained profits would be used to supplement our daily working capital, to fulfill our main business development needs.

We have, for the years ended December 31, 2016 and 2017, consecutively implemented profit distribution proposals to return to our investors. The accumulated profit distribution for the years ended December 31, 2016, 2017 and 2018 amounted to RMB1,446.8 million, which has exceeded the requirement provided in our Articles of Association that “the accumulated profit distribution made in cash by the Company in the latest three years shall not be less than 30% of the average annual distributable profit attributable to the owners of the parent company in the consolidated statements in the latest three years”.

The independent non-executive directors were of the view that the aforesaid 2018 annual profit distribution proposal of the Board of Directors had comprehensively considered the significance of our proposed non-public offering of shares, taking into account of our long-term development and the interests of all of our shareholders. The Board of Directors had performed the voting procedures for the matter in accordance with the requirements of relevant laws and regulations and considered that there is no circumstance detrimental to the interests of our shareholders, especially to our minority shareholders. Meanwhile, it would help us to ensure smooth implementation of our major capital projects, facilitate our healthy and sustainable development.

 

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On March 31, 2020, the Board of Directors considered and approved the 2019 annual profit distribution proposal. It was recommended by the Board of Directors that the 2019 annual distribution be approximately RMB819 million in cash. Based on the total share capital of 16,379,509,203 shares of the Company, the cash distribution per share would be RMB0.050 (before tax) in cash which will be distributed to holders of A shares of the Company in RMB and to holders of H shares of the Company in HKD.

On March 30, 2021, the Board of Directors considered and approved the 2020 profit distribution proposal in the second regular meeting in 2021, and recommended the Company not to distribute profit for 2020.

The independent non-executive directors of the Company consider that the Company’s 2020 profit distribution proposal is in line with the objective situation of the Company, that the consideration procedures are legal and valid, and that the proposal is in line with the PRC Company Law, the PRC Securities Law, relevant laws and regulations of the CSRC and the Shanghai Stock Exchange and the relevant provisions of the articles of association of the Company. The proposal does not damage the interests of investors, especially the interests of small and medium shareholders. The independent non-executive directors of the Company agreed to submit the 2020 profit distribution proposal to the 2020 annual general meeting of the Company for consideration.

The aforesaid profit distribution proposal is subject to consideration and approval by the shareholders at the 2020 general meeting of our Company.

Our Board of Directors declares dividends, if any, in Renminbi, with respect to H Shares on a per share basis and pays such dividends in HK dollars. Any final dividend for a fiscal year is subject to shareholders’ approval. The Bank of New York Mellon (the “BNYM”), as depositary, converts the HK dollar dividend payments and distributes them to holders of ADSs in U.S. dollars, less conversion expenses. Under PRC Company Law and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of the H Shares share proportionately on a per share basis in all dividends and other distributions declared by our Board of Directors, if any, based on the foreign exchange conversion rate published by PBOC, on the date of the distribution of the cash dividend.

We believe that our dividend policy strikes a balance between two important goals providing our shareholders with a competitive return on investment and assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives. The declaration of dividends is subject to the discretion of our Board of Directors, which takes into account the following factors:

 

   

our financial results;

 

   

capital requirements;

 

   

contractual restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us;

 

   

our shareholders interests;

 

   

the effect on our creditworthiness;

 

   

general business and economic conditions; and

 

   

other factors our Board of Directors may deem relevant.

Pursuant to PRC laws and regulations, dividends may only be distributed after allowance has been made for: (i) recovery of losses, if any and (ii) allocations to the statutory surplus reserve. The allocation to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC Generally Accepted Accounting Principles. Our distributable profits for the current fiscal year will be equal to our net profits determined in accordance with IFRSs, less allocations to the statutory surplus reserve.

B. Significant Changes

Significant Post Financial Statements Events

On March 12, 2021, the Company issued two series of corporate bonds with a total principal of RMB9 billion on the Shanghai Stock Exchange. The first series of corporate bonds with a total principal amount of RMB3 billion bears interest at the rate of 3.95% per annum and the principal of the bonds will mature and become repayable on March 12, 2031. Another series of corporate bonds with a total principal amount of RMB6 billion bears interest at the rate of 3.68% per annum and the principal of the bonds will mature and become repayable on March 12, 2027.

On March 29, 2021, the Company’s extraordinary general meeting approved the Proposal for the Non-public Issuance of A shares by China Eastern Airlines Corporation Limited, pursuant to which the Company will issue 2,494,930,875 A Shares to CEA Holding. It is expected that the proceeds to be raised will be not more than RMB10,828 million.

Item 9. The Offer and Listing

A. Offer and Listing Details

The principal trading market for our H Shares is the HKEX (Code: 00670). The ADSs, each representing 50 H Shares, have been issued by BNYM as Depositary and are listed for trading on the NYSE under the symbol “CEA”. Prior to our initial public offering and subsequent listings on the NYSE and the HKEX on February 4 and 5, 1997, respectively, there was no market for our H Shares or ADSs. Our publicly traded domestic shares, or A shares, have been listed on the Shanghai Stock Exchange (Code: 600115) since November 5, 1997.

 

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As of December 31, 2020, there were 5,176,777,777 H Shares issued and outstanding. As of December 31, 2020 and April 15, 2021, there were 58 and 56 registered holders, respectively, of American Depositary Receipts evidencing 1,323,052 and 1,338,412 ADSs, respectively. Since nominees hold certain of the ADSs, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or the number of ADSs beneficially held by U.S. persons. A total of 11,202,731,426 domestic ordinary shares were also outstanding as of December 31, 2020.

B. Plan of Distribution

Not applicable.

C. Markets

Our H Shares are listed for trading on the HKEX (Code: 00670), our ADSs are listed for trading on the NYSE under the symbol “CEA” and our A Shares are listed for trading on the Shanghai Stock Exchange (Code: 600115).

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The following is a brief summary of certain provisions of our Articles of Association, as amended. Such summary does not purport to be complete. For further information, you and your advisors should refer to the text of our Articles of Association, as amended, and to the texts of applicable laws and regulations. A copy of the English translation of our Articles of Association, as amended on December 31, 2019, is attached as an exhibit to this Annual Report on Form 20-F (which is incorporated by reference).

Selected Summary of the Articles of Association

We are a joint stock limited company established in accordance with the Company Law of the People’s Republic of China (the “Company Law”), the “State Council’s Special Regulations Regarding the Issue of Shares Overseas and the Listing of Shares Overseas by Companies Limited by Share” (the “Special Regulations”) and other relevant laws and regulations of the State. We are established by way of promotion with the approval under the document “Ti Gai Sheng” 1994 No. 140 of the PRC State Commission for Restructuring the Economic System. We are registered with and obtained a business license from China’s State Administration Bureau of Industry and Commerce on April 14, 1995. On February 8, 2017, we completed the “Combination of Three Licenses into One” procedures for our business license, organization code certificate and tax registration certificate. The unified social credit code of our business license after the integration is 913100007416029816.

We were incorporated in the PRC for the purpose of providing the public with safe, punctual, comfortable, fast and convenient air transport services and other ancillary services, to enhance the cost-effectiveness of these services and to protect the lawful rights and interests of shareholders.

Board of Directors

The Board of Directors shall consist of seven (7) to thirteen (13) directors, who are to be elected at the shareholders’ general meeting (excluding employee representative directors, who shall be elected or removed by employee representative assembly) and will hold a term of office for three (3) years. At least one-third of the members of the Board of Directors shall be independent directors. The directors are not required to hold shares of our Company.

Directors who are either directly or indirectly materially interested in a contract, transaction or arrangement or proposed contract, transaction or arrangement with our Company (other than his contract of service with our Company) shall declare the nature and extent of his interests to the Board of Directors at the earliest opportunity, whether or not the contract, transaction or arrangement or proposal is otherwise subject to the approval of the Board of Directors.

 

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In accordance with our Articles, a director shall abstain from voting at a board meeting, the purpose of which is to approve contracts, transactions or arrangements that such director or any of his or her associates (as defined in the relevant rules governing the listing of securities) has a material interest in. Such director shall not be counted in the quorum for the relevant board meeting.

Unless the interested director discloses his interests in accordance with our Articles of Association and the contract, transaction or arrangement is approved by the Board of Directors at a meeting in which the interested director is not counted in the quorum and refrains from voting, a contract, transaction or arrangement in which that director is materially interested is voidable at the instance of our Company except as against a bona fide party thereto acting without notice of the breach of duty by the interested director. A director is also deemed to be interested in a contract, transaction or arrangement in which an associate of the director is interested.

Our Articles provide that our Company shall not in any manner pay taxes for or on behalf of a director or make directly or indirectly a loan to or provide any guarantee in connection with the making of a loan to a director of our Company or of our Company’s holding company or any of their respective associates. However, the following transactions are not subject to such prohibition: (i) the provision by our Company of a loan or a guarantee of a loan to a company which is a subsidiary of our Company; (ii) the provision by our Company of a loan or a guarantee in connection with the making of a loan or any other funds to any of its directors, administrative officers to meet expenditure incurred or to be incurred by him for the purposes of our Company or for the purpose of enabling him to perform his duties properly, in accordance with the terms of a service contract approved by the shareholders in general meeting; (iii) our Company may make a loan to or provide a guarantee in connection with the making of a loan to any of the relevant directors or their respective associates in the ordinary course of its business on normal commercial terms, provided that the ordinary course of business of our Company includes the lending of money or the giving of guarantees.

Our Articles do not contain any requirements for (i) the directors’ power to vote compensation to themselves or any members of their body, in the absence of an independent quorum or (ii) the directors to retire by a specified age.

Description of the Shares

As of December 31, 2020, our share capital structure was as follows: 16,379,509,203 ordinary shares, comprising a total of 11,202,731,426 A Shares, representing 68.39% of our total share capital, a total of 5,176,777,777 H Shares, representing 31.61% of our total share capital.

Our ordinary shareholders shall enjoy the following rights:

 

  (i)

the right to dividends and other distributions in proportion to the number of shares held;

 

  (ii)

the right to attend or appoint a proxy to attend Shareholders’ general meetings and to vote thereat;

 

  (iii)

the right of supervisory management over the Company’s business operations, and the right to present proposals or enquiries;

 

  (iv)

the right to transfer shares in accordance with laws, administrative regulations and provisions of these Articles of Association;

 

  (v)

the right to obtain relevant information in accordance with the provisions of these Articles of Association, including:

 

  (1)

the right to obtain a copy of these Articles of Association, subject to payment of the cost of such copy;

 

  (2)

the right to inspect and copy, subject to payment of a reasonable charge;

 

  (a)

all parts of the register of shareholders;

 

  (b)

personal particulars of each of the Company’s directors, supervisors, general manager, deputy general managers and other senior administrative officers, including:

 

  (aa)

present name and alias and any former name or alias;

 

  (bb)

principal address (residence);

 

  (cc)

nationality;

 

  (dd)

primary and all other part-time occupations and duties;

 

  (ee)

identification documents and their relevant numbers;

 

  (c)

state of the Company’s share capital;

 

  (d)

reports showing the aggregate par value, quantity, highest and lowest price paid in respect of each class of shares repurchased by the Company since the end of the last accounting year and the aggregate amount paid by the Company for this purpose;

 

  (e)

minutes of Shareholders’ general meetings and the accountant’s report;

 

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  (vi)

in the event of the termination or liquidation of the Company, to participate in the distribution of surplus assets of the Company in accordance with the number of shares held; or

 

  (vii)

other rights conferred by laws, administrative regulations and these Articles of Association.

A shareholder (including a proxy), when voting at a Shareholders’ general meeting, may exercise such voting rights in accordance with the number of shares carrying the right to vote and each share shall have one vote. Resolutions of shareholders’ general meetings shall be divided into ordinary resolutions and special resolutions. To adopt an ordinary resolution, votes representing more than one half of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. To adopt a special resolution, votes representing more than two-thirds of the voting rights represented by the shareholders (including proxies) present at the meeting must be exercised in favor of the resolution in order for it to be passed. Our ordinary shareholders are entitled to the right to dividends and other distributions in proportion to the number of shares held, and they are not liable for making any further contribution to the share capital other than as agreed by the subscriber of the relevant shares on subscription. Our Articles of Association provide that a controlling shareholder (as defined in the Articles of Association) shall not approve certain matters which will be prejudicial to the interests of all or some of other shareholders by exercising his/her voting rights.

The Listing Agreement between us and the HKEX further provides that we may not permit amendments to certain sections of the Articles of Association subject to the Mandatory Provisions for the Articles of Association of Companies Listed Overseas promulgated by the State Council Securities Commission and the State Restructuring Commission on August 27, 1994 (the “Mandatory Provisions”). These sections include provisions relating to (i) varying the rights of existing classes of shares; (ii) voting rights; (iii) our power to purchase our own shares; (iv) rights of minority shareholders; and (v) procedures upon liquidation. In addition, certain amendments to the Articles of Association require the approval and assent of relevant PRC authorities.

Shareholders’ Meetings

Shareholders’ general meetings are divided into annual general meetings and extraordinary general meetings. Shareholders’ general meetings shall be convened by the Board of Directors. Annual general meetings are held once every year and within six (6) months from the end of the preceding financial year. The Board of Directors shall convene an extraordinary general meeting within two (2) months of the occurrence of any one of the following events:

 

  (i)

where the number of directors is less than the number of directors required by Company Law or two-thirds of the number of directors specified in these Articles of Association;

 

  (ii)

where the unrecovered losses of the Company amount to one-third of the total amount of its share capital;

 

  (iii)

where shareholder(s) holding 10 per cent or more of the Company’s issued and outstanding shares carrying voting rights request(s) in writing the convening of an extraordinary general meeting; or

 

  (iv)

when deemed necessary by the Board of Directors or as requested by the supervisory committee.

When we convene a shareholders’ general meeting, written notice of the meeting shall be given forty five (45) days before the date of the meeting to notify all of the shareholders in the share register of the matters to be considered and the date and place of the meeting. A shareholder who intends to attend the meeting shall deliver his written reply concerning the attendance of the meeting to us twenty (20) days before the date of the meeting. When we convene a shareholders’ annual general meeting, shareholders holding three per cent or more of the total voting shares of the Company shall have the right to propose new motions in writing, and we shall place those matters in the proposed motions within the scope of functions and powers of the Shareholders’ general meeting on the agenda.

Shareholders’ Rights

Set forth below is certain information relating to the H Shares, including a brief summary of certain provisions of the Articles, and selected laws and regulations applicable to us.

Sources of Shareholders’ Rights

The rights and obligations of holders of H Shares and other provisions relating to shareholder protection are principally provided in the Articles of Association and Company Law. The Articles of Association incorporate mandatory provisions in accordance with Mandatory Provisions. We are further subject to management ordinances applicable to the listed companies in Hong Kong SAR and the United States, as our H Shares are listed on the HKEX and the NYSE (in the form of ADSs).

In addition, for so long as the H Shares are listed on the HKEX, we are subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “HKSE Rules”), the Securities and Futures Ordinance of Hong Kong (the “SFO”) and the Hong Kong Code on Takeovers and Mergers and Share Repurchases.

Unless otherwise specified, all rights, obligations and protections discussed below are derived from the Articles of Association, Company Law and abovementioned laws and regulations.

 

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Significant Differences in the H Shares and A Shares

Holders of H Shares and A Shares, with minor exceptions, are entitled to the same economic and voting rights. The Articles of Association provide that dividends or other payments payable to A Share holders shall be declared and calculated in Renminbi and paid in Renminbi, while those to H Share holders shall be declared and calculated in Renminbi and paid in the local currency at the place where such H Shares are listed (if there is more than one place of listing, then the principal place of listing as determined by the Board of Directors).

Restrictions on Transferability and the Share Register

All fully paid up H Shares will be freely transferable in accordance with the Articles of Association unless otherwise prescribed by laws and/or administrative regulations. There are no restrictions on the ability of investors who are not PRC residents to hold H Shares.

Pursuant to the Articles of Association, we may refuse to register a transfer of H Shares unless:

 

  (1)

a fee (for each instrument of transfer) of HK$2.50 or any higher fee as agreed by the Stock Exchange has been paid to us for registration of any transfer or any other document which is related to or will affect ownership of or change of ownership of the shares;

 

  (2)

the instrument of transfer only involves H Shares;

  (3)

the stamp duty chargeable on the instrument of transfer has been paid;

 

  (4)

the relevant share certificate and upon the reasonable request of the Board of Directors any evidence in relation to the right of the transferor to transfer the shares have been submitted;

 

  (5)

if it is intended to transfer the shares to joint owners, then the maximum number of joint owners shall not exceed four (4); or

 

  (6)

we do not have any lien on the relevant shares.

If we refuse to register any transfer of shares, we shall within two months of the formal application for the transfer provide the transferor and the transferee with a notice of refusal to register such transfer. No changes in the shareholders’ register due to the transfer of shares may be made within thirty (30) days before the date of a Shareholders’ general meeting or within five (5) days before the record date established for the purpose of distributing a dividend.

Merger and Acquisitions

In the event of the merger or division of our Company, a plan shall be presented by our Board of Directors and shall be approved in accordance with the procedures stipulated in our Articles of Association and then the relevant examining and approving formalities shall be processed as required by law. A shareholder who objects to the plan of merger or division shall have the right to demand that we or the shareholders who consent to the plan of merger or division acquire such dissenting shareholders’ shareholding at a fair price. The contents of the resolution of merger or division of our Company shall be made into special documents for shareholders’ inspection.

Repurchase of Shares

We may, with approval according to the procedures provided in these Articles of Association and subject to the approval of the relevant governing authority of the State, repurchase our issued shares under the following circumstances:

 

  (i)

cancelation of shares for the reduction of capital;

 

  (ii)

merging with another company that holds shares in our Company;

 

  (iii)

issue of shares in connection with staff shareholding plans or share incentives;

 

  (iv)

requesting our Company to purchase its own shares where shareholders object to the merger or demerger resolution of a general meeting;

 

  (v)

issue of shares in connection with convertible bonds issued by the Company;

 

  (vi)

deemed necessary by the Company for protecting the Company’s value and shareholders’ interests; or

 

  (vii)

other circumstances permitted by relevant laws and administrative regulations.

We shall not repurchase our issued shares except under the circumstances stated above.

We may, with the approval of the relevant State governing authority for repurchasing shares, conduct the repurchase in one of the following ways:

 

  (i)

making a pro rata general offer of repurchase to all our shareholders;

 

  (ii)

repurchasing shares through public dealing on a stock exchange;

 

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  (iii)

repurchasing shares by an off-market agreement outside a stock exchange; or

 

  (iv)

by any other mean which is permitted by law and administrative regulations and by the authorities in charge of the securities and stock exchanges in the place where our Company is listed.

Interested Shareholders

Articles 89 and 90 of our Articles of Association provide the following:

Article 89: the following circumstances shall be deemed to be a variation or abrogation of the class rights of a class:

 

  (i)

to increase or decrease the number of shares of such class, or increase or decrease the number of shares of a class having voting or equity rights or privileges equal or superior to those of the shares of that class;

 

  (ii)

to effect an exchange of all or part of the shares of such class into shares of another class or to effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class;

 

  (iii)

to remove or reduce rights to accrued dividends or rights to cumulative dividends attached to shares of such class;

 

  (iv)

to reduce or remove a dividend preference or a liquidation preference attached to shares of such class;

 

  (v)

to add, remove or reduce conversion privileges, options, voting rights, transfer or pre-emptive rights, or rights to acquire securities of the Company attached to shares of such class;

 

  (vi)

to remove or reduce rights to receive payment payable by the Company in particular currencies attached to shares of such class;

 

  (vii)

to create a new class of shares having voting or equity rights or privileges equal or superior to those of the shares of such class;

 

  (viii)

to restrict the transfer or ownership of the shares of such class or add to such restrictions;

 

  (ix)

to allot and issue rights to subscribe for, or convert into, shares in the Company of such class or another class;

 

  (x)

to increase the rights or privileges of shares of another class;

 

  (xi)

to restructure the Company where the proposed restructuring will result in different classes of shareholders bearing a disproportionate burden of such proposed restructuring; or

 

  (xii)

to vary or abrogate the provisions of this Chapter.

Article 90. Shareholders of the affected class, whether or not otherwise having the right to vote at Shareholders’ general meetings, shall nevertheless have the right to vote at class meetings in respect of matters concerning sub-paragraphs (2) to (8), (11) and (12) of Article 89, but interested shareholder(s) shall not be entitled to vote at class meetings.

The meaning of “interested shareholder(s)” as mentioned in the preceding paragraph is:

 

  1.

in the case of a repurchase of shares by offers to all shareholders or public dealing on a stock exchange under Article 31, a “controlling shareholder” within the meaning of Article 54;

 

  2.

in the case of a repurchase of shares by an off-market contract under Article 31, a holder of the shares to which the proposed contract relates; and

 

  3.

in the case of a restructuring of the Company, a shareholder within a class who bears less than a proportionate obligation imposed on that class under the proposed restructuring or who has an interest in the proposed restructuring different from the interest of shareholders of that class.

Ownership Threshold

There are no ownership thresholds above which shareholder ownership is required to be disclosed.

Changes in Capital

Article 79(1) provides that any increase or reduction in share capital shall be resolved by a special resolution at a shareholders’ general

meeting.

Changes in Registered Capital

The Company may reduce its registered share capital. It shall do so in accordance with Company Law, any other relevant regulatory provisions and the Articles of Association.

 

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C. Material Contracts

For a summary of any material contracts entered into by our Company or any of our consolidated subsidiaries outside of the ordinary course of business during the last two years, see “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 7. Major Shareholders and Related Party Transactions”.

D. Exchange Controls

The Renminbi is not currently a freely convertible currency. SAFE, under the authority of PBOC, controls the conversion of Renminbi into foreign currency. Prior to January 1, 1994, Renminbi could be converted to foreign currency through the Bank of China or other authorized institutions at official rates fixed daily by SAFE. Renminbi could also be converted at swap centers open to Chinese enterprises and foreign invested enterprises subject to SAFE approval of each foreign currency trade, at exchange rates negotiated by the parties for each transaction. Effective January 1, 1994, a unitary exchange rate system was introduced in China, replacing the dual-rate system previously in effect. In connection with the creation of a unitary exchange rate, the PRC government announced the establishment of an inter-bank foreign exchange market, the China Foreign Exchange Trading System, or CFETS, and the phasing out of the swap centers. Effective December 1, 1998, the swap centers were abolished by the PRC government.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. The PRC government further reformed the Renminbi exchange rate regime in 2012 and 2014. On August 11, 2015, the PBOC announced an adjustment to the mechanism of determining the midpoint price of Renminbi to the U.S. dollar to make the exchange rate of Renminbi more market-based. The modified mechanism allows traders to consider the closing exchange rate in the previous trading day when they quote the mid-point price for Renminbi against the U.S. dollar. The PRC government may make further adjustments to the exchange rate system in the future.

In general, under existing foreign exchange regulations, domestic enterprises operating in China must price and sell their goods and services in China in Renminbi. Any foreign exchange received by such enterprises must be sold to authorized foreign exchange banks in China. A significant portion of our revenue and operating expenses are denominated in Renminbi, while a portion of our revenue, capital expenditures and debts are denominated in U.S. dollars and other foreign currencies. Renminbi is currently freely convertible under the current account, which includes dividends, trade and service-related foreign currency transactions, but not under the capital account, which includes foreign direct investment, unless the prior approval of the SAFE, is obtained. As a foreign investment enterprise approved by the MOC, we can purchase foreign currency without the approval of SAFE for settlement of current account transactions, including payment of dividends, by providing commercial documents evidencing these transactions. We can also retain foreign exchange in our current accounts, subject to a maximum amount approved by SAFE, to satisfy foreign currency liabilities or to pay dividends. However, the relevant PRC government authorities may limit or eliminate our ability to purchase and retain foreign currencies in the future. Foreign currency transactions under the capital account are still subject to limitations and require approvals from SAFE. This may affect our ability to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions. We cannot assure you that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy our foreign exchange liabilities.

E. Taxation

The taxation of income and capital gains of holders of H Shares or ADSs is subject to the laws and practices of China and of jurisdictions in which holders of H Shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the H Shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-U.S. federal laws. Accordingly, you should consult your own tax adviser regarding the tax consequences of an investment in the H Shares and ADSs. The discussion is based upon laws and relevant interpretations in effect as of the date of this Annual Report, all of which are subject to change.

Hong Kong Taxation

The following discussion summarizes the relevant Hong Kong tax rules relating to the ownership of H shares or ADSs purchased in connection with the global offering and held by you.

Dividends

Under current Hong Kong Inland Revenue Department practice, no profits tax is payable by the recipient in respect of dividends we paid.

Taxation of Capital Gains

Gains derived from the sale of capital assets are specifically exempt from profits tax. Thus, no profits tax is imposed on capital gains arising from the sale of property (such as H shares) acquired and held as a capital asset. However, whether or not there has been a sale of a capital asset depends upon the particular circumstances of a case. If a person carries on a business in Hong Kong of trading and dealing in securities and derives trading gains from that business in Hong Kong, that person could be subject to profits tax on any assessable gains. Assessable gains include gains derived from the sales of H shares effected on the HKEX as these gains are considered to be trading gains derived from Hong Kong. Profits tax is currently charged at the rate of 16.5% for corporations and at the rate of 15% for unincorporated businesses (i.e. individuals). From the year of assessment 2018/19, a concessionary tax rate (i.e. half of the current tax rate) can apply to corporations or unincorporated businesses for the first HK$2 million of assessable profits subject to applicable conditions.

 

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No profits tax liability will arise on trading gains arising from the sale of ADSs where the purchase and sale is effected outside Hong Kong (e.g. on the NYSE).

Hong Kong Stamp Duty

Stamp duty is payable by each of the seller and the purchaser for every sold note and every bought note created for every sale and purchase of the H shares. Stamp duty is levied at the total rate of 0.2% (0.1% for each of sold note and bought note) of the value of the H shares transferred (the buyer and seller each paying half of such stamp duty). The rate will increase to the total rate of 0.26% (0.13% for each of sold note and bought note) for every sale and purchase of H Shares occurring on or after August 1, 2021. In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H shares. If one of the parties to a sale is a non-resident of Hong Kong and does not pay the required stamp duty, the amount of unpaid stamp duty will be assessed on the instrument of transfer (if any), and the transferee will be liable for payment of such unpaid amount.

If the withdrawal of H shares when ADSs are surrendered or the issuance of ADSs when H shares are deposited results in a change of beneficial ownership in the H shares under Hong Kong law, stamp duty at the rate cited above for a sale and purchase transaction will apply. The issuance of ADSs for deposited H shares issued directly to the depositary, or for the account of the depositary, should not result in any stamp duty liability. Holders of the ADSs are not liable for the stamp duty on transfers of ADSs outside of Hong Kong so long as the transfers do not result in a change of beneficial interest in the H shares under Hong Kong law.

Hong Kong Estate Duty

Hong Kong estate duty was abolished with respect to persons passing away on or after February 11, 2006.

China Taxation

The following is a general summary of certain Chinese tax consequences of the acquisition, ownership and disposition of the H Shares and ADSs. This summary does not purport to address all material tax consequences of the ownership of Shares or ADSs, and does not take into account the specific circumstances of any particular investors. This summary is based on the tax laws of China as in effect on the date of this Annual Report, as well as on the U.S.- China Treaty, all of which are subject to change (or changes in interpretation), possibly with retroactive effect.

In general, and taking into account the earlier assumptions, for Chinese tax purposes, holders of ADRs evidencing ADSs will be treated as the owners of the H Shares represented by those ADSs, and exchanges of H Shares for ADSs, and ADSs for H Shares, will not be subject to Chinese tax.

Taxation of Dividends by China

Individual investors

The Provisional Regulations of China Concerning Questions of Taxation on Enterprises Experimenting with the Share System, or the Provisional Regulations, provide that dividends from Chinese companies are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20%. However, on July 21, 1993, the Chinese State Tax Bureau issued a Notice Concerning the Taxation of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign Investment Enterprises, Foreign Enterprises and Foreign Individuals Numbered Guo Shui Fa [1993] No. 045, or No. 45 Document which provides that dividends from a Chinese company on shares listed on an overseas stock exchange, or Overseas Shares, such as H Shares (including H Shares represented by ADSs), would not be subject to Chinese withholding tax. The relevant tax authority has not collected withholding tax on dividend payments on Overseas Shares.

Nevertheless, No.45 Document was abolished on January 4, 2011 and the Chinese State Tax Bureau issued, on June 28, 2011, a Notice on Issues Concerning the Levy of Individual Income Tax following the Abolishment of the Document Numbered Guo Shui Fa [1993] No. 045, according to which dividends from a Chinese company are ordinarily subject to a Chinese withholding tax levied at a flat rate of 20% unless otherwise provided in applicable tax treaties between the PRC and the jurisdiction in which the relevant non-resident shareholder resides. The tax rate of dividends income tax applicable to Hong Kong residents and U.S. residents is 10% of the gross amount of interest.

On October 31, 2014, CSRC, MOF and STA together promulgated The Notice of the Relevant Tax Policy of the Pilot Program for the Shanghai-Hong Kong Stock Connect (Hereinafter refer to as Notice 81) which has been effective from November 17, 2014. Pursuant to Notice 81, for dividends acquired by mainland individual investors through investment in H-shares listed on the HKEX via Hong Kong-Shanghai Stock Connect, the H-share company shall apply to China Securities Depository and Clearing Corporation Limited (Hereinafter refer to as Chinese Clearing). Chinese Clearing shall provide the H-share company with the mainland individual’s investor rosters. The H-share company withholds the individual income tax at the tax rate of 20%. For dividends acquired by mainland securities investment funds through investment in shares listed on the HKEX via Hong Kong- Shanghai Stock Connect, the individual income tax shall be collected according to the regulations hereinbefore.

For dividends acquired by Hong Kong investors’ (including enterprises and individuals) through investment in A-shares listed on the Shanghai Stock Exchange, before Hong Kong Securities Clearing Limited (Hereinafter refer to as Hong Kong Clearing) meet the conditions to provide Chinese Clearing with detailed data of investors’ identity certification and time of shareholding, the different tax policy according to time of shareholding will temporarily not to be implemented. The listed company shall withhold the income tax at the tax rate of 10%, declare, and pay to the tax authorities.

 

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Enterprises

Under the EIT Law amended in 2018 and the implementation regulations to the EIT Law amended on April 23, 2019, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises”, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business. The rate could be reduced or eliminated pursuant to an applicable double taxation treaty.

In accordance with the Notice 81, (a) dividends acquired by mainland enterprise investors through investment in shares listed on the HKEX via Hong Kong-Shanghai Stock Connect will be accounted into their total income and subject to enterprise income tax according to the laws. Among those, for the dividends acquired by mainland enterprise investors through continuing holding H shares for 12 months, the enterprise income tax shall be exempted according to the laws; (b) the H-share company listed on the HKEX shall apply to the Chinese Clearing to offer them the mainland enterprise investor rosters. The H-share company does not withhold income tax from dividends for mainland enterprise investors. The enterprises shall declare and pay by themselves; and (c) the mainland enterprise investors may apply for tax credits for dividends already withheld by non-H-share listed companies on the HKEX when declaring and paying the enterprise tax income.

Tax Treaties

Non-Chinese investors resident in countries, which have entered into double-taxation treaties with China, may be entitled to a reduction of the withholding tax imposed on the payment of dividends to non-Chinese investors of our Company. China currently has double-taxation treaties with a number of other countries, including Australia, Canada, France, Germany, Japan, Malaysia, the Netherlands, Singapore, the United Kingdom and the United States.

Notice 81 explicitly stipulated that for Hong Kong investors who are tax residents of other countries that have signed the tax agreement with China to regulate the tax rate for dividends, that income tax to be less than 10%, the enterprise or individual may, by themselves or withholding agents, apply for the treatment of the tax agreement to the tax authorities of listed companies. After examination and verification, the tax authorities shall reimburse the difference between the levied tax and the payable tax according to the tax agreement.

Under the U.S.-China Treaty, China may tax a dividend paid by our Company to a U.S. holder of H Shares or ADSs only up to a maximum of 10% of the gross amount of such dividend.

Taxation of Capital Gains by China

Individual Investors

According to the Law of Individual Income Tax and its implementation regulations, holders of H Shares or ADSs who have no domiciles and do not reside in China or who have no domiciles but have resided in China for less than one year shall be subject to individual income tax on their income gained within China, unless otherwise reduced or eliminated pursuant to an applicable double taxation treaty.

Notice 81 requires, (a) from November 17, 2014 to November 16, 2017, the income tax from transfer price difference will be temporarily exempted for mainland individual investors’ investment in shares listed on the HKEX through Hong Kong-Shanghai Stock Connect; (b) for mainland individual investors, the business tax from transfer price difference in the trading of shares listed on the HKEX through Hong Kong- Shanghai Stock Connect will be temporarily exempted according to current policy; and (c) the income tax and the business tax from transfer price difference will be temporarily exempted for Hong Kong individual investors’ investment in A-shares listed on the Shanghai Stock Exchange.

Under the U.S.-China Treaty, China may only tax gains from the sale or disposition by a U.S. holder of H Shares or ADSs representing an interest in the company of 25% or more.

Enterprises

Under the EIT Law and the implementation regulations to the EIT Law, gains realized upon the sale of Overseas Shares by “non-resident enterprises” may be subject to PRC taxation at the rate of 10% (or lower treaty rate).

Pursuant to Notice 81, the income tax from transfer price difference will be accounted into the total income and subject to enterprise income tax according to the laws for mainland enterprise investors’ investment in shares listed on the HKEX through Hong Kong-Shanghai Stock Connect. For mainland enterprise investors, the business tax from transfer price difference in the trading of shares listed on the HKEX through Hong Kong-Shanghai Stock Connect shall be levied and exempted according to current policy. Income tax and the business tax from transfer price difference will be temporarily exempted for Hong Kong enterprise investors’ investment in A-shares listed on the Shanghai Stock Exchange.

PRC Stamp Tax

Chinese stamp tax imposed on the transfer of shares of Chinese publicly traded companies under the Share System Tax Regulations should not apply to the acquisition or disposition by non-Chinese investors of H Shares or ADSs outside of China by virtue of the Provisional Regulations of the People’s Republic of China Concerning Stamp Tax, which provides that Chinese stamp tax is imposed only on documents executed or received within China or that should be considered as having been executed or received within China.

 

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According to Notice 81, Hong Kong investors shall pay stamp duty according to mainland current tax policy when trading, inheriting, gifting the A- shares listed on the Shanghai Stock Exchange through Hong Kong-Shanghai Stock Connect.

United States Federal Income Taxation

Each potential investor is strongly urged to consult his, her or its own tax adviser to determine the particular U.S. federal, state, local, treaty and foreign tax consequences and U.S. reporting and compliance requirement of acquiring, owning or disposing of the H Shares or ADSs.

The following is a general discussion of material U.S. federal income tax consequences of purchasing, owning and disposing of the H Shares or ADSs if you are a U.S. Holder, as defined below, use the U.S. Dollar as your functional currency, and hold the H Shares or ADSs as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986 as amended (the “Code”). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H Shares or ADSs, and does not take into account U.S. Holders (defined below) who may be subject to special rules including:

 

   

tax-exempt entities;

 

   

banks, financial institutions, and insurance companies;

 

   

real estate investment trusts, regulated investment companies and grantor trusts;

 

   

dealers or traders in securities, commodities or currencies;

 

   

U.S. Holders that own, actually or constructively, 10% or more of our voting stock;

 

   

persons who receive the H Shares or ADSs as compensation for services;

 

   

U.S. Holders that hold the H Shares or ADSs as part of a straddle or a hedging or conversion transaction;

 

   

persons that generally mark their securities to market for U.S. federal income tax purposes;

 

   

U.S. citizens or tax residents who are residents of the PRC;

 

   

U.S. citizens or tax residents who are subject to Hong Kong profits tax;

 

   

certain U.S. expatriates;

 

   

certain accrual method taxpayers subject to special tax accounting rules as a result of their use of financial statements;

 

   

a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) or pass-through entity (or a partner, member, or owner thereof);

 

   

persons who are resident or have a permanent establishment outside of the United States;

 

   

dual resident corporations; or

 

   

U.S. Holders whose functional currency is not the U.S. dollar.

Moreover, this description does not address U.S. federal estate, gift or alternative minimum taxes, the U.S. federal unearned Medicare contribution tax, or any state or local tax consequences of the acquisition, ownership and disposition of the H Shares or ADSs.

This discussion is based on the Code, its legislative history, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, all of which are subject to change, or changes in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.

You are a “U.S. Holder” if you are a beneficial owner of H Shares or ADSs and are:

 

   

an individual citizen or resident of the United States for U.S. federal income tax purposes;

 

   

a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any political subdivision thereof;

 

   

an estate the income of which is subject to U.S. federal income tax without regard to its source; or

 

   

a trust if (i) a court within the United States is able to exercise primary supervision over it’s administration, and one or more U.S. persons have the authority to control all of the substantial decisions of such trust, or (ii) such trust has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.

If a partnership (including any entity treated as a partnership for U.S. federal tax purposes) is a beneficial owner of the H Shares or ADSs, the treatment of the partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H Shares or ADSs, such investor should consult its tax advisor.

In general, if you hold ADRs evidencing ADSs, you will be treated as the owner of the H Shares represented by the ADSs. Exchanges of H shares for ADRs, and ADRs for H shares, generally will not be subject to U.S. federal income tax.

INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.

 

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Distributions on the H Shares or ADSs

Subject to the discussion below under “— Passive Foreign Investment Company”, the gross amount of any distribution (without reduction for any withheld PRC tax) we make on the H Shares or ADSs out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be includible in your gross income as ordinary dividend income when the distribution is actually or constructively received by you, or by the depositary in the case of ADSs. Distributions that exceed our current and accumulated earnings and profits will be treated as a return of capital to you to the extent of your basis in the H Shares or ADSs and thereafter as capital gain. We, however, may not calculate earnings and profits in accordance with U.S. tax principles. Accordingly, it is expected that distributions by us to U.S. Holders, if any, will generally be treated as dividends. Any dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from U.S. corporations or foreign corporations. The amount of any distribution of property other than cash will be the fair market value of such property on the date of such distribution.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by certain non-corporate U.S. Holders will be subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on H Shares or ADSs will be treated as qualified dividends if either (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service, or IRS, has approved for the purposes of the qualified dividend rules, or (ii) the dividends are, with respect to ADSs, readily tradable on a U.S. securities market, provided that we were not, in each case, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company, or PFIC. The Agreement Between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “Treaty”) has been approved for the purposes of the qualified dividend rules, and we expect to qualify for benefits under the Treaty. We are considered a qualified foreign corporation with respect to the ADSs because our ADSs are listed on the NYSE. There can be no assurance that our shares will be considered readily tradable on an established securities market in later years. Finally, based on our audited consolidated financial statements and relevant market data, we believe that we did not satisfy the definition for PFIC status for U.S. federal income tax purposes with respect to our 2018 taxable year. In addition, based on our audited consolidated financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market data, we do not anticipate becoming a PFIC for our 2019 taxable year or any future year. However, our status in the current year and future years will depend on our income and assets (which for this purpose depends in part on the market value of the H Shares or ADSs) in those years. See the discussion below under “— Passive Foreign Investment Company”. Our U.S. counsel expresses no opinion with respect to our expectations contained in this paragraph.

Holders of H Shares or ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.

If we make a distribution paid in Hong Kong dollars, you may be treated as recognizing currency gain or loss to the extent the distributions on the H Shares or ADSs are affected by currency gains or losses. U.S. Holders should consult their own tax advisors regarding the calculation of non-U.S. currency gain or loss.

Subject to various limitations, any PRC tax withheld from distributions in accordance with the Treaty may be deductible or creditable against your U.S. federal income tax liability depending on the application of the section 904 foreign tax credit limitation provisions. Dividends paid by us generally will constitute income from sources outside the United States, however, there can be no assurance that you will be eligible to benefit from a foreign tax credit. The foreign tax credit rules are complex and U.S. Holders should consult their own tax advisors regarding the effect of these rules in their particular circumstance.

In the event we are required to withhold PRC income tax on dividends paid to U.S. Holders on the H Shares or ADSs (see discussion under “— China Taxation”), you may be able to claim a reduced 10% rate of PRC withholding tax if you are eligible for benefits under the Treaty. You should consult your own tax adviser about the eligibility for reduction of PRC withholding tax.

Sale, Exchange or Other Disposition

Subject to the discussion below under “— Passive Foreign Investment Company”, upon a sale, exchange or other disposition of the H Shares or ADSs, you will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H Shares or ADSs. Generally, gain or loss recognized upon the sale or other disposition of H Shares or ADSs, will be long-term capital gain or loss if the U.S. Holder’s holding period for such H Shares or ADSs exceeds one year, and generally will be income or loss from sources within the United States. For non-corporate U.S. Holders, the U.S. income tax rate applicable to net long-term capital gain currently will not exceed 20%. The deductibility of capital losses is subject to significant limitations.

A U.S. Holder that receives foreign currency from a sale or disposition of H Shares or ADSs may be treated as recognizing currency gain or loss. U.S. Holders should consult their own tax advisors regarding the calculation of non-U.S. currency gain or loss.

Any gain or loss will generally be U.S. source gain or loss for foreign tax credit limitation purposes and as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Under the Treaty, however, if any PRC tax were to be imposed on any gain from the disposition of H Shares or ADSs, the gain could be treated as PRC-source income. U.S. Holders are urged to consult their tax advisors regarding the interaction of the foreign tax credit and the Treaty “resourcing” rule.

 

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Passive Foreign Investment Company

In general, a foreign corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries: